- FSI Sector Allocation
The beginning of 2021 has already seen some wild intra-month swings. January saw the S&P 500 race ahead over 3% but ended the month down a bit more than 1%. For different reasons, February experienced a similar pattern as it also started the month strongly as the index rallied about 6% only to surrender over...
- Alpha City
2021 Outlook: Transitioning To Recovery, Further Gains Ahead
This week we released both our 2021 Year Ahead Outlook research report as well as our Outlook Webinar, which was f of actionable conclusions for investors. Today, we wanted to invite you to Watch The Replay, and also summarize the presentation’s bigger points. Moreover, the Webinar included 10 favorable large cap stock ideas that our research portends will likely be market beating performers. Bottom line: From current levels, our work suggests that the strategic reward/risk tradeoff for the S&P 500 is still tilted towards reward when we forecast out to year-end. We are in the early innings of a major corporate profit recovery that is being powerfully combined with massive amounts of monetary and fiscal stimulus. Thus, our research strongly suggests investors need first to be positioned to take advantage of a favorable equity environment by lowering cash levels and fixed-income allocations. Next, there needs to be some thoughtfulness regarding the two major style shifts occurring and will likely continue to maximize one's alpha: 1) Growth/FAANG to Value/Cyclicals; and 2) Large Cap to Small/Mid Cap. Main Macro Assumptions: The U.S. economy will expand between 3.7 – 4.0% yr/yr, which assumes only moderate fiscal stimulus.A global synchronous economic recovery, which helps Cyclical/Value related areas around the world. Despite being a consensus call, we expect the U.S. dollar to continue weakening. Inflation expectations and interest rates drift higher. The Fed remains accommodative for all of 2021 despite the possibility for some rumblings from the bond market vigilantes, and that the “Fed Put” will be in full force during the year. Bigger Picture Conclusions: U.S. vs. MSCI World ex. U.S. — Moving closer Neutral from longstanding OverweightStocks vs. Bonds/Cash — Continuation of our heavy Overweight for StocksLarge Cap vs. SMid — Bias down the cap scale for the first time in over five yearsOffense vs. Defense — Continuation of our heavy Overweight for OffenseGrowth/FAANG vs. Value/Cyclicals — Continuation of our strong bias towards Value but not abandoning Growth S&P 500 Targets: 2021 OEPS to end the year at $178, or roughly 25% yr/yr growth versus our expectation that 2020 will finish between $142-146, and a preliminary estimate of $205 for 2022. All based on moderate fiscal stimulus during the year and NOT the large $2T figures being discussed. Profit margins to rise as the top line begins to return to levels achieved Pre-COVID and Corporate America begins to reap the benefits of the significant streamlining of their operations and the lowering of their cost bases.S&P 500 Forward P/E multiple of 20-22x, which assumes that both inflation and interest rate expectations moderately drift up, and Fed policy to remain accommodative.S&P 500 year end price target range is 4100-4510.
- FSI Sector Allocation
2020 December FSI Sector Outlook
Despite the ongoing election controversies and the continued rise in COVID19 cases, November has been a great month for equity markets. Indeed, the Standard & Poor’s 500 index has risen over 10%, again reaching all time highs during the month. Importantly, there have been positive developments on the COVID19 vaccine front that have shifted the investor outlook away from the current negative pandemic data to a potentially more optimistic future environment where global economies begin to reopen and heal.
- Signal from Noise
2020 Could Be the Year "Animal Spirits" Return to Equities
– Strong equity return years—like 2019’s near 30%—often followed by good years – Another double-digit equity return expected, fueled by improving world growth – Tech, financials, materials, energy and industrial sector stocks should benefit Raise a glass if you have one handy —get one if you don’t—with just a few trading days left in 2019, the year will likely finish up as one of the best of the decade for U.S. equity investors, with a total return near 30%, as of Dec. 24. This is all the more remarkable since the 2010-2019 decade itself has been a robust one for stocks, too, up 182%, fourth best decade since 1900, according to Bespoke Investment Group data. Source: FSInsight, Bloomberg It’s the time of year when some pull out their crystal balls, but we use data here as well as history and good old-fashioned analysis. In 2020, I’m looking for the old bull to continue its yearend move to a nice canter from a leisurely trot, with the stock market rising at least 10%, as the EPS of the companies in the Standard & Poor’s 500 index (SPX) increase about the same percentage or perhaps better. SPX EPS should finish around $163 this year and estimates are for $178 in 2020. Indeed, while in 2019 the market’s price/earnings multiple carried the bull almost entirely—rising more than 25% to 18 times from less than 15 times on little or no earnings improvement—the market will have to produce the earnings growth that is expected of it, 10%, for the bull to continue rallying in 2020. It’s possible I’m underestimating the reviving “Animal Spirits,” which my colleague Tom Lee has alluded to in his recent “2020 Strategy Outlook: Reviving Animal Spirits,” Dec. 19. He has a base case SPX target of 3,450 based—versus about 3,235 currently—with a 17.9 price/earnings (P/E) multiple on estimated EPS of $193 in 2021. That’s a number the market will be discounting 12 months from now. While an 18 forward multiple is higher than the 15 long term average, it’s interesting to note that this entire bull market’s (trailing) P/E has risen 50% from 2009, not atypical for bulls. Valuations look particularly reasonable compared to bond yields below 2%. Let’s line up the various positives that undergird my call. The house forecast is for the global economy to pick up steam in 2020 from a languid 2019, and that should help SPX earnings grow. Purchasing Manager Indexes should recover and the easing trade tensions between the U.S. and China will support stocks. Meanwhile, China itself is showing signs of economic reacceleration. Additionally, earnings growth will likely get a boost from an improving inventory cycle, at a multi-year low. The Federal Reserve, a strong headwind in 2018, turned into a tailwind in 2019 when it began to reduce the Fed funds interest rate, and it should continue that way in 2020. Unless the economy and inflation really ramp up, unlikely I think, the Fed has said it will remain on the sidelines next year, a plus. There will be potential easing of monetary conditions in Japan and Europe and all this could add 0.5% per quarter to U.S. gross domestic product, again benefiting profits growth. Perhaps the market is already discounting this, as in Q4 stocks of companies in the SPX with the most international revenue exposure have begun to significantly outperform those companies with mostly domestic sales. By the way, materials and technology, sectors we think should benefit in 2020, have the most overseas sales. And what about those “animal spirits”? Until recently, this was a hated bull market, which ironically helped support it. Finally, investor confidence, both institutional and individual, appears to be gaining, though we remain a long way from love or euphoria. I think that FOMO (fear of missing out) is just beginning to take hold and momentum is rising. This can last a while. According to a recent Bank of America Merrill Survey, there has been a pronounced flip in fund manager expectations about the economy to a net +6% from -37% a month ago. This type and size change is unusual, particularly after extended negative readings. Similar past moves have only been seen at inflection points (to positive) in equity markets, such as 1998, 2002 and 2009. Source: FSInsight, Factset Individual investors, who have never really bought into this bull, seem to be getting more interested. According to , there were “impressive” ETF inflows of nearly $52 billion for the week ended Thursday, Dec. 19—the largest weekly inflow on record. Much of that went to equities. The year-to-date total is $342 billion, higher than the year ago inflows ($305 billion). How different the picture is today from 12 months ago, when the market was coming apart at the seams, hitting an intraday bear market on Dec. 24, 2018. What about earnings? The nearby chart shows what industry analysts are projecting. The energy sector, which we favor, is expected to report the highest EPS growth, 21%, according to FactSet. Industrials, another sector we like, is expected to report the second highest, 14.8%. Additionally, SPX firms with more international sales exposure are expected to report higher earnings, 13.8%, relative to those with less, 7.6%. Many stocks are underperforming, even if they are up a lot. The average SPX stock is up 26%, less than the index. Tech is up nearly 50%, but much of it is from Microsoft (MSFT) and Apple (AAPL), and there are even tech stocks that have underperformed. Besides energy and industrials, we are recommending financials, materials and technology, for the long term. While the U.S. is an overweight, by style cyclical and value stocks—which are more plentiful in Europe and China—are also expected to do better in 2020. Wall Street strategist surveys, a modestly good contrarian indicator, show a mean expectation of a 4% rise in 2020. Since 1928, nearly 80% of returns were higher than 10% or worse than -4%, so you should always be asking what might trigger the next big move, in either direction, says the Dow Theory Forecasts newsletter. Meanwhile, the NYSE Advance/Decline line is also at an all-time high and this often leads the market price by four to six months. Over the years, the odds are 85% that the market will be up after a double-digit return, points out Wellington Shields. Indeed. A Happy New Year wish to all our clients and members. Where I could be wrong: In terms of known knowns, the impeachment politics could turn uglier, or a radical leftist Democratic presidential candidate wins the presidency next November. Or the economic data somehow doesn’t improve, contrary to our expectations, EPS doesn’t grow and the recessionary boogeyman returns. Bottom Line: 2020 should provide a strong, double-digit return for equities. 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