See bottom of email for analyst certification and important disclosures.
Payrolls + ISM support "industrial cycle" bottoming --> 2020 economy > 2019 economy. Risk-on into YE and suggest 3,200 S&P 500
we got two critical data points, the jobs report and ISM, both of which support
our view that the industrial cycle is bottoming (PMIs Oct improved over
Sept). And the broader context is, it looks like the economic outlook in
2020 should be an improvement over 2019 — this is in contrast with consensus
expectations/positioning that the US economy is about to tip into
recession. Hence, we expect a risk-on rally into YE.
POINT 1: Newton’s first law of physics in play — strong markets thru Oct 31, stay strong.We compiled market behavior into YE based on YTD gains thru 10/31. The results are striking, since 1930, markets up >17.5% YTD (2019 >20%), see the strongest final 8 weeks with 6% median gain and 83% win ratio.
– This implies S&P 500 3,216. That is a ton of upside and we think warrants risk-on to take advantage of that.
POINT 2: Investors are not positioned for an 8 week, 6% rally…
The data below is from JPMorgan’s Flows and Liquidity and shows that their prime brokerage clients are cautiously positioned. Compare that to 2016, when equities rallied and HF leverage soared. Today, leverage is near 5-year lows.
– HF are not positioned for 2020 economy > 2019 economy. This is why we can see a >6% YE rally.
POINT 3: Overweight Cyclicals + Value + Quality: 25 stock ideas
A few weeks ago, we wrote the “final 10 weeks Playbook” and noted how the highest probability positioning is OW: Cyclicals + Value + Quality.
With the improving industrial outlook, such a positioning is further warranted.
– The tickers are TPR, KSS, LEN, PHM, EXPE, LMT, CAT, CMI, EMR, ROK, IBM, INTC, MXIM, QCOM, QRVO, PLD, CBRE, CCI, IRM, SBAC, CTL, DISCK, T, ATVI and VIAB.