FS Insight Investment Views

Near Term View	Stimulus, COVID-19 rollover, falling VIX point to rebound for Small-Caps
‘21 Target	4,300 (YE P/E 21.1x · 2022 EPS $204)
Our Stock Lists	FSI Sector Allocation Granny Shots Brian's Dunks Factor Strategy

Epicenter Off to Strong Start; Signs of Economic Recovery

Tom Lee, CFA ^AC

Head of Research

THIS REPORT IS SENT SOLELY TO MEMBERS OF FS INSIGHT

Markets wrapped up their first full week of 2021 and after a sloppy stumble on Monday, the S&P 500 managed to recover and close up 1.2% for the week. There has already been a substantial bifurcation of sector performance. Energy is up 9.3% YTD. And of the Epicenter sectors, five out of five are up on a YTD basis.

Equities seem to be telling us to expect a pretty vigorous economic recovery in coming months. And we can see this possibility, given the continued ramp in vaccinations and along with better seasonal weather (starting March), COVID-19 cases could turn down sharply.

Nevertheless, COVID-19 is unpredictable and the renewed post-holiday surge in cases reminds us that the virus remains prevalent. Daily cases came in at 261,571 on Thursday, a new all-time high and up +41,113 vs one week ago. Keep in mind that the holiday effect is going to cause distortions for several weeks. Over Thanksgiving, it was not until a full two weeks later that underlying trends were visible. This will be the case with current data, meaning mid-Jan is when we can start to get a better handle on trends.

On the vaccine front, the developments this week were clear: vaccinations are ramping up. Yesterday about 580,000 doses were administered in the US. This is an impressive daily rise of 31% and inches the US closer to achieving one million per day, at which point about 30% of citizens would be vaccinated by early April.

The vaccines have proven effective in trials, but the “real world” test is whether infections slow after a region has vaccinated >30% or more of its residents. The nation to watch is Israel. As data below nearby shows, the % of citizens vaccinated is 17% (up from 6% a week ago) and is on course to hit 30% within 2 weeks.

So, this is the real test. Cases in Israel should begin to slow dramatically in coming weeks. And if they do, we see a roadmap for the end of the pandemic. If cases do not slow, this is worrisome and could be an indication that the vaccine does not work.

STRATEGY:Epicenter off to strong start to kick off the year

There have been some gains posted by Energy stocks YTD, and the sector is the best performing so far, up ~9.3% YTD (short year so far). But take a look at the 10-year price history of Energy vs S&P 500 nearby. The surge in Energy stocks YTD is a mere blip. Even getting to parity with the start of 2020 levels means a +70% more in Energy stocks. And look at the decline over the past decade. Needless to say, if Energy proves to be a leader in 2021, this is just the beginning.

Here are the nine stocks that we consider the Energy trifecta that are rated Overweight by each of the three macro teams: HP, NOV, SLB, EOG, PXD, HFC, MPC, PSX, XEC.

But the story does not end at Energy. Five out of five Epicenter stock sectors are in the green on a YTD basis and I continue to view this as a favorable place to deploy capital.

That is not to mention that the current economic data has been robust and supportive of the rally in epicenter stocks. Both December ISMs (manufacturing and services) posted very solid beats for the month and are up versus November. In fact, I’d consider these levels to be arguably boomy.

Source: FSInsight, Bloomberg

Furthermore, investor sentiment remains cautious. The latest AAII Bulls less Bears survey, which is a reliable way to measure retail investor sentiment for older Americans, came in at 12.5 which is a middle of the road reading, and not really indicative of ebullience. And more importantly, expectations for future volatility, as measured by the VIX futures market remain stubbornly high over the next 9 months. As we wrote in our 2021 outlook, periods of high volatility tend to be followed by a collapse in volatility which is supportive for equity markets and suggests a rise in institutional investment.

Bottom Line: Investors are not as bullish you may think. Equities seem to be telling us to expect a pretty vigorous economic recovery in coming months and I continue to favor Epicenter stocks.

Figure: Way forward ➜ What changes after COVID-19
Per FSInsight

Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019

Markets on Track For Q1 Tactical Peak; EBAY is a Timely Buy

Robert Sluymer

Managing Director and Technical Strategist

After yet another volatile start to the week, equity markets have resumed their uptrend following the Georgia election with cyclicals accelerating. Many managers have had to scramble to add risk back to their portfolios raising the question “has anything changed technically?”.

The simple answer is no. As I wrote last week “The first few days and weeks of January are notoriously volatile so I would caution readers of overreacting to headlines too quickly at the beginning of the year. It’s possible equity markets pivot lower early in January but my expectation is for an additional move higher into late January-early February before our weekly momentum data peaks signaling a tactical top.”

Looking through January, the technical roadmap that has the highest likelihood for success is further upside as more managers add risk and more cyclical exposure in anticipation of further stimulus. However, in the same way I’ve cautioned readers from turning overly cautious to negative headlines through the summer and fall, particularly around politics, I will be cautioning investors from becoming excessively bullish, at least from a tactical, multi-month perspective heading into late January and early February. I can’t state for certain that we will see the market pullback, but many of our trend and momentum cycle indicators are working toward overbought levels that suggest preparing for a pullback into Q2. I’ll be looking for divergences/weaknesses in some of the recent leading areas, such as small-caps and emerging markets, and strength in more defensive areas, such as staples and healthcare, as a sign the market’s internals are changing. The bottom line here is to remain patient and to pay attention to the market’s technical changes more than ever, particularly as headlines become more optimistic.

What to do? Every portfolio should hold a core list of stocks that are in strong price and relative performance uptrends but I look for stocks that are bottoming intermediate-term as ideas to allocate new capital to. What do I mean by bottoming intermediate-term? Take a look at the eBay chart above. The weekly momentum indicator in the top panel is a useful technical tool to track the intermediate-term or 1-2 quarter trend shifts. After peaking in July, it is now showing evidence of bottoming and turning up just as EBAY bottoms at support near its rising 40-week (200-day) moving average.

Bottom line: I view EBAY as a timely idea to increase exposure to in a portfolio. I recommend investors remain patient and pay attention to the market’s technical changes more than ever, particularly as headlines become more optimistic.

Figure: Weekly Sector Review
Source: Fundstrat, FactSet

The Technology and consumer discretionary sectors continue to trend sideways relative to the S&P 500 while cyclical sectors continue to emerge and safety underperform.

Figure: Best and worst performance sectors over past 3 months

GRANNY SHOTS: Best bets in 2021 - Week 1

Tom Lee, CFA ^AC

Head of Research

Below we’ve highlighted stocks that we recommend across at least two of our investment strategies for 2021. These companies could benefit from multiple themes and secular tailwinds – clear picks in our view.

Figure: Granny Shots are the “best of the best”
Stocks which appear in multiple themes. Source: FSInsight

Figure: Granny Shots Portfolio Performance
Monthly. Source: FSInsight. FactSet as of 01/07/21

Figure: Intersection of investment recommendations by strategy
As of 01/07/21, Source: FSInsight, FactSet

The stocks in the Granny Shots portfolio collectively outperformed the S&P 500 by 5340 bps since its inception (S&P 500 is up 46.5% during the same period).

Chaotic Week With DC Change Ahead

L . Thomas Block

Washington Policy Strategist

On a personal note, last Sunday was the 50th anniversary of my taking the oath as a Congressional staffer when I became the legislative assistant for my hometown Congressman while finishing my senior year at American University. In 1971 there were large anti-Vietnam protests in DC and the Capitol was surrounded by armed troops. One day I was driving to work, and my car was surrounded by protesters and troops came to my rescue and escorted me up to Capitol Hill. Disruption and even violence are not new. The lack of preparation on Capitol Hill Wednesday was inexcusable. In my Monday note for Fundstrat, I wrote about the likelihood of trouble with those attending the rally on the National Mall, so I just don’t understand how the Capitol stood basically unprotected. A very troubling day for the USA.

Georgia race: It’s hard to believe that the news of two Democratic wins in Georgia was all but overlooked by the invasion of the Capitol; it was an historic election which will change control of the Senate on Jan. 20th when Vice President Harris starts to preside.

The 50/50 split will make passage of far-left progress legislation unlikely; the most important advantage of Senate control is setting the agenda. Chuck Schumer rather than Mitch McConnell will be deciding what bills come to the Senate floor. In the past few weeks it was Leader McConnell who blocked a vote on a clean $2000 stimulus bill, now Democrats will be making that decision.

There have been 50/50 splits before, and it increases the leverage of each individual Senator in the Majority Party. One Democratic Senator siding with united Republicans can stop a bill, and there are a handful of moderate Democrats.

What legislation will move? Everyone I talk to in DC believes that Covid relief will dominate the first 100 days of the Biden Administration. The Congress is likely to consider another round of individual stimulus checks though it may be less than $2,000. The amount is now the focus and the reality that it will pass guides the decision. Money for state and local government will be in the next round of Covid relief, and a higher weekly unemployment supplement is under review.

While Covid is top of the agenda immigration is likely to be acted on early in the new Administration. Every Democrat I know believes that a serious shortcoming of the early Obama Administration was not acting on immigration. There are clearly at least 10 Republicans who support DACA and other immigration measures which should allow the issue to move without death by filibuster.

Healthcare and the ACA may also be an early issue in the new Administration as a decision by the SCOTUS is likely at some point in the spring. There is a possibility the Court will rule against the ACA but give Congress a window to make needed changes. The Medicare Part D prescription drug programs are also are likely to see action aimed at lowering the price of drugs. The original Part D program passed under President G.W. Bush prohibited the government from using its purchasing power to negotiate drug prices; repealing the limitation is high on the list of ideas that are being discussed.

46th President: President Trump admitting last night that a new Administration will take over on January 20th removes one level of concern about the transition; and no one was surprised when the President announced that he would not attend the ceremony. Hopefully, officials will be better prepared with Capitol security on the big day.

House Democrats seem committed to a second impeachment with a vote next week. It’s not clear if the Senate will take any action. Impeachment would require a Senate trial. Time seems to be on the side of the President to leave as scheduled at noon on Jan. 20th.

Shelton Again Nominated; Consensus on Asset Purchases

Vito J. Racanelli

Senior Editor & Market Intelligence Analyst

President Trump reintroduced the recently rejected nomination of Judy Shelton in the United States Senate on January 4th, the first day of the new legislative session. Obviously, the subsequently occurring Capitol Riot has made the prospect of success about as near-zero as it can be, even though chances were slim prior to the tragic and unsettling event.

Minutes were released from the December 15-16th Federal Reserve Open Market Committee (FOMC) meeting, and while they certainly showed that the body is wary of increasing headwinds due to the worsening healthcare situation, they also showed that most Fed governors remain firmly confident of a robust post-pandemic recovery. There was unanimous consensus, a rare thing in Washington indeed, about an ‘outcomes based’ approach to curtailing asset purchases. Essentially, the Fed went out of its way to tell the public that it will do all it can to avoid a repeat of the 2013 ‘taper tantrum’. This removes the prospect of what could otherwise be a nasty downside surprise. The minutes also showed only limited support amongst committee members for purchasing longer-dated US Treasuries as the Fed did in the wake of the 2008-2009 Global Financial Crisis.

Senator Brown (D-OH) will become the new Chairman of the Senate Banking Committee after the dual Democratic victories in the Georgia Senate run-offs. We will keep you posted on how the Democratic control of the Senate could affect the relationship between fiscal and monetary authorities. There has been murmuring both inside and outside the Fed of revamping financial regulations. Expect one of the first targets of the Dems to be the recently stripped-down Community Reinvestment Act (CRA).

Aside from this major change on the Fed’s most relevant congressional committee, some Federal Reserve members have openly spoken positively about what the prospects for more robust stimulus mean for monetary policy’s effectiveness. Despite the concern of short-term headwinds, a definite bullishness could be detected in the comments of some Fed Governors, like when Jeremy Bullard of St. Louis said this week that “The ingredients for higher inflation are in place, you have a powerful fiscal policy in place and perhaps more to come,” he said before also predicting that the economy is ‘poised to boom’ after the pandemic. Encouragingly, Richmond Fed President Barkin also said that he saw the recent rise of the 10-year yield above 1% as a positive. He said it represents positive inflation expectations from investors and not worrisome financial tightening.

One of the things these minutes and recent comments from Fed Governors have confirmed is just how dovish the body has become. Loretta Mester, President of the Cleveland Fed, usually advocates for higher rates than the rest of her colleagues. Even she said that she would find 2.5% inflation acceptable. Charles Evans of the Federal Reserve Bank of Chicago said that he would be amenable to what would have been previously considered the astronomical figure of 3% inflation. Evans also importantly said that concerns about future asset bubbles should be addressed through supervision and regulation, not the agency’s dual mandate.

Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.13% up from last week 0.93% last week.