Click here to download our 2021 Outlook presentation –> DOWNLOAD HERE
__________________________________________
Our 2021 Year Ahead Outlook webinar will be TODAY, December 17th at 3:00 PM EST
Joining us for a webinar, which will include the Fundstrat Macro Team. The following topics will be discussed:
• Overall macro and strategy outlook 2021
• Economic outlook, what can we reasonably expect for GDP growth?
• Where are we in this investment cycle and what themes will dominate?
• We discuss key policy risks and upsides
• New investment themes
• Full EPS and sector outlook
Don’t miss it!!!!
You must register in advance.
Register here to attend –> REGISTRATION LINK
Click here to download our 2021 Outlook presentation –> DOWNLOAD HERE
Should you have any questions, please do not hesitate to contact us at (212) 293-7140 or email inquiry@fsinsight.com.
__________________________________________
STRATEGY: 2021 Year Ahead –> “Pause that refreshes” leads to ~25% rally
COVID-19 is slowing across the US, but it is soaring in the state of CA. On Wednesday, CA reported a somewhat mind boggling 53,711 cases. This is 24% of all cases in the US. But CA case growth is not showing any signs of slowing. Given the state’s very strict lockdowns, something else is going very badly there.
– CA is 12% of the US population.
– Thus, 24% of US cases highlights how huge the outbreak is in CA.
Source: COVID-19 Tracking and Fundstrat
And as below shows, ex-CA, the 7D delta has been negative for 7 days now. In other words, COVID-19 is essentially rolling over in the other 49 states while it is exploding in CA. OK, it is also rising in other states, but none are seeing an outbreak of this size and scale.
Source: COVID-19 Tracking and Fundstrat
2021 Year Ahead… less bad = good
Today’s commentary is taking a slightly different format. We still have COVID-19 commentary (see Point #1) but we spend this comment almost entirely on our 2021 outlook. The details for that webinar are above.
We also have a few 2021 Year ahead webinars in the pipeline.
– Don’t miss Tom DeMark, of DeMark Analytics on 12/21/2020 (you should have already received that registration link)
– Tom DeMark made the most timely call in March…remember that call?
– Well, we have him AGAIN!!!! DON’T MISS THIS!!!!!
2021 Year ahead –> Good stays Good…
Our 2021 Year ahead, in a nutshell:
– 2021 should be more of the same as 2H2020 –> stocks strong, economy surging, Fed easy, cash coming off sidelines
– plus: COVID-19 waning (vaccine, etc.) + massive unleashing of pent-up demand (consumer + capex)
– plus: real rates (10Y less nominal GDP) -6%, the lowest in >60 years which gonna favor asset heavy BIG TIME
This should lead to:
– profit margin explosion
– drop in equity risk premia
– VIX likely to average <20 2021-2023 –> cyclical stock gains
BUT…
– history says stocks likely to correct Feb-April 2021 with a 10% dip to 3,500
– 2H2021 should rally 25% to S&P 500 4,300
Source: Fundstrat
It is natural instinct to think a ‘boom’ in 2021 is too optimistic. One can point to healthy levels of spending already. Or one can cite the destruction of the US economy. But take a look at the China PMIs below. BOOM. BOOM. Post-COVID-19, absolute massive surge. Think about vacation travel, pent-up capex, etc. And one can see that a large economic bounce is possible.
Source: Fundstrat
Real interest rates will be insanely negative in 2021… never seen in >60 years = boom for ‘real assets’
The interest rate environment might be particularly supportive of a boom. Below is a chart showing a proxy for ‘real interest’ rates, which we define as 10-yr rate less nominal GDP (not 10Y less inflation). We use GDP because it is a measure of how rates should be relative to economic growth:
– since 1960, 10Y has averaged 201bp above nominal GDP
– 2021 nominal GDP is expected to be 7%-8% (5%-6% real)
– US 10-yr is <1% currently, so this ‘real rate’ is -6%
Negative real rates -6% has not been seen for 60-years.
Source: Fundstrat
What does this mean? That means capital deployed earns unusually high returns. In this world of -6% real rates, one would want to be long assets. Or asset heavy, because the cost of borrowing is so low relative to growth in the economy. The data actually bears this out:
– since 1960, Value beats Growth when real rates are in the lowest decile (-3.6% or lower)
– Value outperformance vs Growth is 910bp (next 12M) with a 75% win-ratio
– Basically, when ‘real rates negative’ is only consistent time Value beats Growth (see below)
Source: Fundstrat
One area we could see this demand surge is in US housing. De-urbanization. Millennials. Etc. We think US housing starts could surpass 2mm in the next 12-18 months. According to data from the NARE (national association of realtors), this would add 4 million jobs and 4% of GDP growth. So it’s a big deal.
Source: Fundstrat
Stocks likely correct between Feb to April 2021… down 10% to S&P 500 3,500
We believe stocks are due for a sharp pullback in Feb to April 2021 timeframe. This is consistent with the Technical views expressed by our Head of Technical Strategy, Rob Sluymer, and would also align well with prior bull markets.
Source: Fundstrat
Take a look at 2020 compared to the 1982 and 2009 bull markets. Both saw prodigious stock gains in the first 12 months. And then a deep pullback. If we mirror:
– 1982 analog –> Feb 2021 correction starts
– 2009 analog –> Late April 2021 correction starts
In other words, there is going to be a period of major market turmoil. Be ready for this. Accumulate some dry powder in January 2021. I would be capitalizing on that sell-off and adding to ‘epicenter’ stocks.
Source: Fundstrat
SECTORS: More reasons to be overweight Epicenter in 2021… keep adding to Epicenter
My top 3 sectors OW for 2021 are:
– Consumer Discretionary
– Industrials
– Energy
I also include the sector recommendations from the three heads of strategy at Fundstrat:
– Macro (me)
– Global Portfolio Strategy (Rauscher)
– Technicals (Sluymer)
I also asked each of us to highlight our ‘top 3’ favorite sectors. Those are designated with the ‘blue’ numbers:
– Trifectas (all 3 of us made ‘top 3’) –> Consumer Discretionary and Industrials
– Least consensus of my ‘top 3’ –> Energy
Source: Fundstrat
So why am I selecting these 3 sectors? The rationale is described below. But it has mainly due to the fact we see a strong economic recovery in 2021 (stocks in 2020 are telling us this). And if such is the case, we will see the strongest operating leverage in these 3 sectors.
Energy charts are so bad, you have to go back to ‘Whale oil’ times to see them worse…
You might wonder why Energy? Biden is not a fan of carbon polluters. And Tesla and electrification dominate.
Here are some reasons:
– Supply will be constrained in 2021-onwards due to White House policy
– Capital will be constrained in 2021-onwards as Private Equity ‘fool me twice’ no thanks
– Demand recovery possible due to US boom and global boom and air travel etc.
– Energy stocks are dirt cheap, cheaper than other sectors
Lastly…
– Energy charts are so bad, we have to go back to ‘whale oil’ times to see them worse
Source: Fundstrat
Here are the 100-year charts for the ‘Top 3’ sectors below and you can see, they are all awful. But Energy is the most miserable.
Source: Fundstrat
But these sectors are the cheapest on a P/S basis. On a P/B basis, Energy is rock bottom. Way below rock bottom.
Source: Fundstrat
What could go wrong? SO MANY THINGS! STAY VIGILANT AND SAFE
As for what can go wrong. Plenty.
Keep in mind, in 2020, almost everything went wrong. That is why we had a Greater than the Great Depression. And a market crash. But the world also got lucky. 2021 has plenty of risks. We put together a list below. And this is the tip of the iceberg.
– So many things could go wrong
– This is what will keep us worried
– We hope you stay vigilant
Source: Fundstrat
STRATEGY: 67 stocks (*) in the ‘Top 3’ sectors…
Our data science team, led by tireless Ken, has put together the trifecta list of stocks, coming from the ‘top 3’ sectors: Discretionary, Industrials and Energy. These are stocks that there is consensus between myself, Rauscher and Sluymer.
Consumer Discretionary (30 stocks)
AN, GM, F, HOG, GRMN, LEG, TPX, PHM, TOL, NWL, HAS, MAT, PII, MGM, HLT, MAR, NCLH, RCL, WH, WYND, SIX, DRI, SBUX, FL, GPS, LB, CRI, VFC, GPC, BBY
Industrials (28 stocks)
AGCO, OC, ACM, WAB, EMR, GNRC, NVT, CSL, GE, MMM, IEX, PNR, CFX, DOV, MIDD, SNA, XYL, FLS, DAL, JBLU, LUV, MIC, KEX, UNP, JBHT, R, UBER, UHAL
Energy (9 stocks)
HP, NOV, SLB, EOG, PXD, HFC, MPC, PSX, XEC
Source: Fundstrat
(*) The 67 stock ideas are the subset of the “Epicenter” Trifecta stock list we published on December 11th, 2020. To view the full list of stock idea, click here. Please note that the stocks rated OW on this list meet the requirements of our investment theme as of the publication date. We do not monitor this list day by day. A stock taken off this list means it no longer meets our investment criteria, but not necessarily that it is neutral rated or should be sold. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile.
Click here to download our 2021 Outlook presentation –> DOWNLOAD HERE
ADDENDUM: We are attaching the stock lists for our 3 portfolios:
We get several requests to give the updated list for our stock portfolios. We are including the links here:
– Granny Shots –> core stocks, based on 6 thematic/tactical portfolios
– Trifecta epicenter –> based on the convergence of Quant (tireless Ken), Rauscher (Global strategy), Sluymer (Technicals)
– Biden vs Trump –> based on correlation to either candidate odds
Granny Shots:
Full stock list here –> Click here
Tickers: AAPL, AMZN, AXP, BF.B, CSCO, EBAY, GOOG, GRMN, GWW, INTC, KLAC, LEN, LOW, MNST, MSFT, MXIM, NVDA, OMC, PM, PYPL, QCOM, TSLA, XLNX
Trifecta Epicenter (*):
Full stock list here –> Click here
Tickers: AN, GM, F, HOG, GRMN, LEG, TPX, PHM, TOL, NWL, HAS, MAT, PII, MGM, HLT, MAR, NCLH, RCL, WH, WYND, SIX, DRI, SBUX, FL, GPS, LB, CRI, VFC, GPC, BBY, FITB, WTFC, ASB, BOH, FHN, FNB, PB, PBCT, RF, STL, TFC, WBS, PNFP, SBNY, NYCB, MTG, AGNC, EVR, IBKR, VIRT, BK, STT, SYF, BHF, AGCO, OC, ACM, WAB, EMR, GNRC, NVT, CSL, GE, MMM, IEX, PNR, CFX, DOV, MIDD, SNA, XYL, FLS, DAL, JBLU, LUV, MIC, KEX, UNP, JBHT, R, UBER, UHAL, HP, NOV, SLB, EOG, PXD, HFC, MPC, PSX, XEC, LYB, EXP, MLM, CF, MOS, ESI, NEU, NUE, RS, SON, STOR, HIW, CPT, UDR, KIM, NNN, VNO, JBGS, RYN
Biden White House vs. Trump White House:
Full stock list here –> Click here
(*) Please note that the stocks rated OW on this list meet the requirements of our investment theme as of the publication date. We do not monitor this list day by day. A stock taken off this list means it no longer meets our investment criteria, but not necessarily that it is neutral rated or should be sold. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile.
POINT 1: Daily cases 223,222, +13,700 vs 7D ago. Ex-CA, daily cases down vs 7D ago. CA cases going GALACTIC PARABOLIC
The latest COVID-19 daily cases came in at 223,222, up +13,700 vs 7D ago.
– CA reported 53,711 cases. That is +22,860 vs 7D ago
– CA is 25% of USA cases now
– WUT?!!!
Source: COVID-19 Tracking Project and Fundstrat
7D delta at +13,700…Wave 3 momentum still slowing — EX-CA, daily cases are rolling over…
Again, the daily change vs 7D ago, in our view, is the leading indicator as it is what influences the 7D moving average.
– ex-CA, daily cases are indeed rolling over in the US
– but CA, wow
Source: COVID-19 Tracking and Fundstrat
CA remains the state with the highest daily count in cases and also among the biggest 7D jump in cases. But COVID-19 is pretty bad everywhere.
Source: COVID-19 Tracking and Fundstrat
CA daily cases per 1mm are now approaching 1,000, which is 2X what NY state saw at its peak. Wow. And as you can see, only 2 states have daily cases per 1mm that are higher (among the top wave states):
– RI
– AZ
Source: COVID-19 Tracking and Fundstrat
As you can see below, CA is 12% of the US population. So the fact that it is 24% of US cases is highlighting how huge the outbreak is in the state. In fact, there are no signs this is slowing at all.
Source: COVID-19 Tracking and Fundstrat
Source: COVID-19 Tracking and Fundstrat