Coincidently, as I was preparing for this week’s note, I came across a quote from Peter Lynch, the legendary portfolio manager of Fidelity’s Magellan Fund between 1977-1990. Peter noted that “Far more money has been lost by investors preparing for corrections than has been lost in the corrections themselves”. I view this as sage advice heading into Q1 2021 as all us on the Fundstrat macro team assesses the risks facing investors early next year. If you are interested in more of Peter Lynch’s food for thought quotes they are readily available on the internet or at this link (click here)
As I noted here over the past few weeks, I am expecting a pullback in Q1 that is likely in the 7-10% range over a period of 2-4 months. I obviously cannot say for certain the exact date when the correction will begin, but my read of the technical data at this point is for further upside in January with a tactical peak developing early to mid-February. This week’s chart below outlines a likely roadmap through Q1.
Peter Lynch
So what should an investor do? If you happened to miss the Fundstrat Macro webinar this past Thursday (click here), Tom Lee, Brian Rauscher and I outline our expectation for equity markets in 2021. Interestingly, while we reach our conclusions independently, we all agree that a pullback in Q1 is likely to be temporary and an opportunity to increase exposure to cyclical stocks. Pullbacks are always unnerving as they develop, but it is important to remember that 7-10% corrections are consistent with the normal, stair-step pattern of higher highs and higher lows that define the uptrend of a longer-term bull cycle. For the active market timing trader running a higher octane, higher risk portfolio, I recommend trimming exposure in early Q1 and having cash ready to redeploy on the pullback. However, returning to Peter Lynch’s quote above, longer-term investors should stay focused on the underlying bullish market cycle, view pullbacks as temporary and as an opportunity to revisit many of the leading cyclicals at better entry points heading into Q2.
Happy Holidays all and thank-you for your support in 2020!
Figure: Weekly Sector Review
Source: Fundstrat, FactSet
- Technology is bouncing back from the lower end of its 2-3 month consolidation as more cyclical sectors, notably financials and energy, pause after strong surges earlier in December.
- Materials interestingly, bounced back from just above its 50-day relative performance moving average keeping its uptrend intact.
- In contrast, safety sectors, such as staples, healthcare and utilities remain in relative downtrends while materials bounced back after a brief pullback.
Figure: Best and worst performance sectors over past 3 months
