What Our Clients Are Talking About Behind The Scenes

The S&P 500 continues to linger near all-time highs while many institutional investors and Wall Street forecasters have found several factors to worry about and how they will negatively impact the health of the equity market.  Since mid-March, there seems to be a new reason every couple of weeks — rising interest rates, fears of decelerating growth, and warming up likely the top spot is an uncontrolled increased in inflation. 

We acknowledge that interest rates are likely to continue to move higher, that GDP growth and PMI readings will begin to sequentially show deceleration, and that inflation is indeed ticking up so all those issues should be monitored and that one or all may ultimately contribute to a significant broad-based correction in stock prices.  

Importantly, however, my research remains steadfast that there is still upside potential for the overall equity market and that my ongoing recommended themes are still intact.  Consequently, I continue to view price moves that are contrary to my medium-term views as opportunities. 

In times like these, when investors may be overly influenced by headline news or market volatility to make some emotional tactical investment decisions, I continue to remind subscribers that it is value added to have a disciplined objective process to help navigate the challenges.  At FSI, we use data driven approaches that form the foundation for our research and idea generation to help our subscribers stay grounded and properly positioned to take advantage of the dominant trend.

With that being said, this week’s comments are below, which include the questions and issues that were brought up the most often in my institutional client meetings, and I will then follow with my responses.

ISSUES

• Despite being in the midst of the earnings reporting season, my calls continue to be dominated by macro discussions. 

• Growth decelerations remain the biggest point of worry and as I have been mentioning during April rising interest rates has not been mentioned. 

• Concerns and confusion regarding companies that posted good earnings results, but their subsequent performance was disappointing. 

• Sectors where there was the most interest were Financials, Technology, Industrials, and Materials.  There has been little to zero proactive interest in Health Care, Staples, Utilities, and legacy Telecom.    

SPECIFIC QUESTIONS

• Can you provide an update on your thoughts regarding a few non-equity asset classes — interest rates, the USD, and commodities?

• Any thoughts of the rotations and leadership during the later parts of April versus the first couple of weeks?

• When looking at the broad-based earnings revisions data are you seeing any signs of peak optimism yet?

• Your tactical indicators have been mainly favorable since their tactical bullish signals from both early March and during the last week in March.  Are they extreme yet and have they rolled over?

• What names from your single stock quantitative selection stood out if I was going to put new money to work right now?

QUESTIONS AND MY ANSWERS

Can you provide an update on your thoughts regarding a few non-equity asset classes — interest rates, the USD, and commodities?

As frequent readers know by now, I do not usually make excessive comments regarding non-equity asset classes although I am always keeping an eye of them and how they might impact my equity market views and the earnings revisions backdrop as captured by my proprietary metric that I call Analyst Sentiment Measure (ASM), which still remains my most important indicator. 

With that being said, I came into 2021 with a forecast for interest rates to move higher throughout the year, that the dollar would be weakish, and the non-precious metal commodity prices would move higher (2021 Outlook).

The period from mid-March until mid-April has caused quite a bit of angst and potential among investors.  First, interest rates began to rise quite quickly during this window while the greenback started moving up, which caused some rotations to occur.  There were many forecasters suggesting economic growth and inflation were surging.  I commented in meetings and in previous Whispers that my work did not support those conclusions.  Then, the calendar flipped to April and there was a big reversal in rates, which was the first drop in yields since November and the biggest decline since last summer.  While this was occurring, the USD fell nearly 2%.  The combination of these shifts caused some more equity market rotations. 

I find it interesting how perceptions around these asset classes and the views on economic growth have moved so much in both directions.  Based on my work, things are still basically on the same course that I laid out in January. 

Thus, my research is still signaling that rates should move higher into year end, the dollar to be weakish, and non-precious metal commodities to be strong, which will likely have a relative benefit for the earnings revisions of Value/Cyclicals, Smid, Energy/Materials sectors, Financials, and historic weak dollar beneficiaries.

Any thoughts of the rotations and leadership during the later parts of April versus the first couple of weeks?

The leadership during the first half of April was dominated by areas that were NOT in my preferred sectors and themes as my recommended positioning lagged as I have been commenting and writing about for weeks.  Many forecasters called for an END of Value/Cyclicals/Recovery/Reflation and SMid trades.  Importantly, my earnings revisions-based work did not support that view and still does not. 

The low in 10-yr yields was on 4/15 and the rotations back to towards my preferred areas resumed and continued into month end.

Many have asked what changed to cause these dramatic tactical reversals.  From my view, there was little real change and the key drivers that I have been discussing are still in place — economic recovery beginning, corporate profit recovery story intact, earnings revisions are healthy and broad based, and policy on both the monetary and fiscal sides remain quite accommodative.  Thus, my work continues to stay the course and use tactical market action opportunistically to keep repositioning into my preferred areas and single stocks. 

Based on a few of my more tactical tools, the rotational environment that has been present since mid-March had a lot to do with short-term overbought/oversold readings and the unwinding or crowded trades NOT the end of the major themes though.  I would remind investors that areas can get tactically overdone on either side and frequently lead to pauses or short-term countertrends moves, but importantly the earnings revisions trends have NOT changed, and my research still strongly suggests they are quite helpful in determining the medium-term trend. 

When looking at the broad-based earnings revisions data are you seeing any signs of peak optimism yet?

NO.  Not only is my analysis not showing any signs of extreme optimism, but it is actually still gaining strength, especially in Value/Cyclicals/Recovery/Reflation areas.  It has been my working hypothesis that my earnings revision work would continue to show strength until the domestic economy was open nationwide for at least 1-2 quarters before the potential for peak readings might show up.  At this point, I have no data that would suggest that I need to change this view. 

Consequently, it would be quite challenging using my process tools and key indicators to have a bearish outlook at this time.  Yes, there is definitely no doubt in my mind that there will be time to shift portfolio positioning and lower risk exposure and that point is getting closer.  Yet, my research is not flashing those signals and until they do I continue to recommend keeping focused on being offensive in our preferred areas and single stocks. 

Your tactical indicators have been mainly favorable since their tactical bullish signals from both early March and during the last week in March.  Are they extreme yet and have they rolled over?

NO and NO.  Apparently, this line of questioning shows up nearly every week.  My key aggressive tactical indicators — HALO, HALO-2, and V-squared (see explanations at the end of the note) — are still all favorable and NOT extreme as I have been stating.  I am on alert for the tactical warning sign, but it still has not appeared. 

What names from your single stock quantitative selection stood out if I was going to put new money to work right now?

I was pressed this past week by several accounts for a broad-based list of names that are favorable in my single stock ERM model and are actionable right now.  The names I am including are not the only ones that my work likes, but they definitely flagged as quite interesting and actionable.

All the names are within the S&P 500, if you are a SMid cap investor or interested in non-US names, please reach out and I will provide those names to you.  These are in no particular order of preference.

HES, DVN, FMC, ECL, PKG, HEI, OTIS, UPS, RHI, SKX, CHH, MAR, ROST, TJX, PNC, GS, AXP, COF, SYY, FIS, GPN, V.

Bottom line:  My research strongly suggests that investors STAY THE COURSE despite the growing anxiety from the institutional crowd as we continue to expect the U.S. equity market to climb the “Wall of Worry”.  My key themes of higher markets, Value/Cyclicals over Growth/FAANG, and SMid over large are still what my research is signaling.  In addition, I continue restate there remains the possibility of bouts of volatility and headline risk over the next couple of weeks as the reporting for Corporate America’s 1Q21 earnings season heads towards its conclusion.  Hence, I am still advising that investors use relative weakness in the sectors/stocks that my work continues to flag as favorable as opportunities and avoid the areas that have unfavorable indicators.

Furthermore, my analysis continues to suggest that as we keep moving into the Spring/Summer and the increasing likelihood that the broad country-wide vaccination deployment reaches key thresholds that the odds of moving towards the national reopening of the U.S. economy rise each day.  It is my view that this definitive shift towards recovery will help strengthen supportive tailwinds for the ongoing equity market rally.  It’s a time for investors to stay disciplined and keep an eye on where things are going and not the day-to-day wiggles so one can take advantage of a favorable backdrop for equities.

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Definitions of HALO, HALO-2, and V-squared