Market Strategy 9/14/2020

Key Takeaways

• The dispersion among sector performance and across market capitalizations suggests opportunities have begun to surface from the latest stock pullback.
• We reintroduce our Global Asset Allocation model in this issue. We’ve tweaked exposure within and among asset classes.
• Current expectations that technology stocks will remain under pressure for some time seem exaggerated to us.
• Data released last week on consumer price inflation showed an uptick in the core rate to 1.7% in August from a year earlier.
• Commodity prices are still off 69% from their July 2008 peak.

This week investors will train their focus increasingly on issues tied to the election and economic data, as well as developments toward stemming the spread and resurgences of the Coronavirus.

September has thus far seen equities as represented by the S&P 500 experience varying degrees of selling on what appears thus far to be increased sensitivity to the rescue program stalemate in Washington, election outcome worries, market valuations as well as an opportunity for some profit taking without fear of missing out (FOMO) after the stock market’s powerful run-up from oversold conditions reached on March 23 through the start of this month.

Since September 2nd when the S&P 500 posted its most recent record high through last Friday’s market close, the benchmark has shed 6.7% as its 11 sectors have declined as much as 11.15% (information technology) to as little as 1.85% (materials sector stocks).

The S&P 400 (mid-caps) index has declined 5.67% in the same period with the greatest sector decline in that index at 11.35% (information technology). The consumer staples and consumer discretionary sectors have relatively outperformed the other sectors in the midcap index, with each declining just 3.17% in the period.

The S&P 600 (small caps) index has fallen 6.33% since September 2 through last Friday with information technology again the worst performer, shedding 10.4% among that benchmark’s sectors. The best relative performing sector among the small caps has been consumer staples, which is off just 3.57% in the period.

In our view, the dispersion among the three indices and within the sectors suggests opportunities may exist on a selective basis across the sectors.

In our view the decline in the stateside equity markets appears relatively contained and orderly at this time presenting some opportunity for longer-term investors to seek out “babies that got thrown out with the bathwater.” There are also opportunities surfacing for some dollar cost averaging and rebalancing among sectors and to buy stocks too often overlooked by investors who at times seemed singularly focused on the tech run-up. Stocks in sectors such as industrials, materials, and financials could garner increased focus.

For nervous investors the recent downdraft has presented opportunity to take some profits without FOMO (fear of missing out).

With only 50 days until the Presidential election headline risk is likely to contribute to volatility in the markets through November 3 and perhaps beyond that if there is a contested outcome. Time will tell soon enough.

Current expectations that technology stocks will remain under pressure for some time seem exaggerated to us. While some technology stocks had gotten overvalued (the high flying names—particularly relatively new companies that soared to prices and multiples that seemed lofty) the core of technology stocks did not appear terribly rich in price considering that developments in technology and innovation have yet to show signs of plateauing in the current cycle. If anything technology has served to keep many segments of the economy not just alive but vibrant during an unprecedented shutdown of large segments of the US and world economies.

Our expectations are for technology to lead in serving companies in the other ten sectors once the spread of Covid-19 is stemmed and the domestic and international economies move toward global expansion. We also expect technology to continue to benefit from a virtuous upgrade cycle from consumers.

In our view diversification, patience, self-knowledge, right-sized expectations and keeping things in context remain key for investors in positioning their portfolios and navigating market conditions, particularly during these times.

We remain diversified in our investment portfolios; maintain an overweight in equities versus fixed income; and favor cyclical sectors over defensive sectors. Our favorite sectors remain: information technology, consumer discretionary, industrials with our contrarian pick, financials (see below for our ratings across the 11 sectors of the S&P 500).

From a global perspective we remain overweight US equities while maintaining meaningful exposure to both developed and emerging markets on expectations that an economic recovery stateside coming out of the Covid-19 shutdown will help boost economic growth around the world and lead to a global economic expansion (similar to the one the world was experiencing just prior to the trade war between the US and China).

We believe stocks at current levels remain vulnerable to catalysts that might surface near term which could enable short-term and nervous investors, as well as traders to take some profits without FOMO (fear of missing out). Pull backs of around 4% to 6% can take place when such a catalyst or confluences of catalysts appear. Investors are often reminded that stocks tend not to move in a straight line higher unchallenged for long. However, such pullbacks (depending on the catalyst for profit taking) could likely present opportunities to buy “babies that get thrown out with the bathwater”.

Our 2020 target price of 3,500 for the S&P 500 (initiated last December) remains in suspension (suspended the morning of March 23rd) at this time while we await greater visibility in the earnings outlook.