The positive seasonal trends for December are underway. Despite a shaky start to the week on Monday with the market opening higher and finishing lower, the S&P 500 rallied hard on Tuesday (12/15) right in typical seasonal fashion and posted a strong close on Friday – finishing up 1.3%. on the week. And given headlines from Washington around the fiscal relief package and government shut down, I’d consider this a win.

On the COVID-19 front, the virus is retreating in (in large numbers) everywhere except the United States. And when the US finally reaches its apex on Wave 3, we should see COVID-19 globally rolling over. Looking at daily cases per 1mm residents, the US ranks #9 in the World. But it is the highest of major nations. For context, Lithuania and Croatia are top of the list with 1,129 and 966 cases per 1mm which is roughly in line with the massive spread we saw in North Dakota and South Dakota.

Stocks up 1.3% on Week; Seasonal Surge Underway

And if there is one State holding the US back from rolling over it is California.

The Golden State reported upwards of 50,000 cases in a single day this week. At current levels, this accounts for about 25% of all daily cases in the US. California only represents about 12% of the population.

And looking at daily cases per one million, California’s are approaching 1,000 which is nearly double what New York State saw at its peak. Wow.

So, clearly something is going very bad there. Cases are rising in the face of very strict lockdowns.

Excluding California, COVID-19 is rolling over in the other 49 states.  Well to be more precise, it is also rising in some other states, but none are seeing an outbreak of this size and scale. And as we are still in the holiday season, the threat of a renewed spread remains high.

Strategy: 2021 Year Ahead –> “Pause that refreshes” leads to ~25% rally

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 overall, I think there are several reasons that 2021 should resemble the performance we have seen in the second half of 2020. But I don’t think it will be a straight ride up.

History says stocks are likely to correct in February -April 2021 with a 10% dip to 3,500. The 1982 and 2009 bull markets provide useful context. Both saw prodigious stock gains in the first 12 months. And then a deep pullback. If we mirror the 1982 analog, the correction starts in February 2021. If we mirror the 2009 analog, the correction starts in February 2021.

Stocks up 1.3% on Week; Seasonal Surge Underway

In other words, there is going to be a period of major market turmoil. Be ready for this. And using our analogs, history says stocks are likely to correct in February – April 2021 with a 10% dip to S&P 500 3,500. So, I’d recommend accumulating some dry powder in January 2021 to capitalize on that sell-off and allocating to ‘epicenter’ stocks.

But overall, I expect 2021 should be more of the same as 2H2020 and see a strong stock market, the economy surging, an easy Fed, and cash coming off sidelines. That is not to mention: (i) COVID-19 is waning and there have been positive developments on the vaccine front, (ii) there will be a massive unleashing of pent-up demand (consumer + capex), and (iii) a falling VIX that is likely to average below 20 through 2021 and 2023. Once through this period of market turmoil, I see the combination of these factors pushing the market up 25% in the second half of the year to S&P 500 4,300.

So, where to put that dry powder to work in January? I like Consumer Discretionary, Energy, and Industrials. And yes, you heard that correctly, Energy. And no, I am not saying that I think oil is going to become more and more popular. But I do see strong demand recovery on the horizon, and context is important. Valuations are far from being stretched: Compared to the other GICS 1 sectors, Energy is at the bottom from a 2021E Price to Book (P/B) perspective and at rock bottom Price to Sales Ratio (P/S). And oh yeah, the price charts from the Energy sector have not been this bad since roughly the Moby Dick era so it certainly a non-consensus strategy.

Bottom Line: The December seasonal surge is underway. Looking forward to 2021, history says stocks are likely to correct in February -April. Overall, I expect 2021 should be similar to 2H2020 and see the most opportunity within Consumer Discretionary, Energy and Industrials.

Figure Comparative matrix of risk/reward drivers in 2020
Per FSInsight

Stocks up 1.3% on Week; Seasonal Surge Underway

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

Stocks up 1.3% on Week; Seasonal Surge Underway

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