Despite the ongoing election controversies and COVID-19 cases still rising, November was a great month for equity markets. The S&P 500 rose over 10% and reached all-time highs. And importantly, there were positive developments on the vaccine front. This has shifted investors’ outlooks away from the current negative pandemic data to an optimistic future that will likely see the U.S. and Global economies start to reopen and begin the much-needed healing process.
While there remain a number of uncertainties from rising COVID-19 cases, to vaccine implications, to potential fiscal stimulus packages, to who may ultimately control the Senate, I see higher highs ahead for equity markets. Our research continues to suggest we are in the early innings a powerful profit cycle that, combined with a favorable fiscal and monetary policy backdrop, will push equity prices higher. Investors should keep their focus on the bigger picture — 6, 12, and 18 months ahead.
On a tactical basis, our key indicators flipped favorable on 11/2 and based on this week’s review are still rising, which keeps us tactically re-aligned with our medium-term bullish stance. Looking closer into the S&P500, our highest-frequency and most aggressive tactical tools are still rising from their last buy signals and are not yet extreme. These indicators extremely helpful in our bullish bottom call on 3/20/20 and at the end of October.
I continue to recommend a barbell approach of both Growth/FAANG and Value/Cyclicals at the expense of cash, bonds, traditional defensive areas (Staples, Utilities, Real Estate, and legacy Telcos). And recommend investors continue making shifts away from Growth towards Value.
This week we increased our sector weightings for Financials and Energy. In the financial sector, our proprietary indicators have improved since being clearly unfavorable for much of 2H20. And at the macro level, an eventual stimulus package, rising expectations of economic recovery and our forecast for U.S. interest rates to move higher are reassuring. Within energy, our key tactical indicators are now mixed after a long-period of being clearly negative which is a marginal improvement and brings us closer to neutral on the sector.
Our update sector recommendations are as follows:
Most preferred sectors: Consumer Discretionary, Industrials, and Materials. With Comm Services and Tech also being better than neutral.
Neutral sectors: Financials
Least preferred sectors: Utilities, Staples, and Real Estate with Health Care and Energy also below neutral.
Bottom line: Any dips in the broad equity market that may occur in the coming weeks based on worsening COVID cases and short-term weak economic data should be viewed as buying opportunities. I continue to recommend a barbell mix of Growth/FAANG and Value/Cyclicals and encourage investors to slowly shift away from Growth and towards Value/Cyclicals.
