Buy the rumor, sell the news Buy the rumor, sell the news http://www.federatedinvestors.com/texPool/static/images/texpool/texpool-logo-amp.png http://www.federatedinvestors.com/texPool/daf\images\insights\article\newspaper-glasses-desk-small.jpg December 17 2020 December 16 2020

Buy the rumor, sell the news

Federated Hermes adds equity exposure, sets 4,500 and 5,000 targets for S&P 500 in 2021 and 2022.

Published December 16 2020

Bottom Line For the third time in the past two months, the Federated Hermes’ PRISM® asset allocation committee raised the equity overweight in our moderate growth portfolio model, lifting the equity allocation to 59% from a neutral 54%. The increase, which occurred late Monday, went to large-cap value, pushing the asset class to a 2% overweight, on expectations that longer-term fundamentals will elevate stocks next year and in 2022. The move was funded by a reduction in domestic government/agencies exposure to a maximum 5% underweight on our belief the benchmark 10-year Treasury yield could drift higher over the course of next year.

Buy the dips The S&P 500 has surged by more than 69% from its March 23 trough to its latest in a series of record highs, including nearly 15% since the end of October. But before Tuesday’s rally, the equity market had traded lower by about 2% over four days, its longest losing streak in three months, prompting Monday’s decision to add to our equity position. Given longer-term fundamental tailwinds that we anticipate will elevate stocks over the next two years, we remain buyers on corrections. That said, we see the potential for an air pocket in the next several weeks as the market confronts a series of near-term headwinds. These include: 

  • A third-wave spike in coronavirus infections. As we’ve crossed the tragic milestone of 300,000 Covid-19-related deaths, Gov. Andrew Cuomo shut down indoor dining in New York City, joining California, Illinois, Michigan, Pennsylvania, Oregon and Washington. Investors may soon experience painful post-traumatic stress disorder flashbacks from last March and April, when President Trump shut down the economy to save lives, ushering in the deepest recession in history. 
  • Friday’s self-imposed spending and stimulus deadlines in D.C. Congress passed a 1-week continuing budget resolution last week but still needs to negotiate and approve a spending package to cover the rest of the federal fiscal year that runs through next September. It’s anticipated they may embed that in their Phase 4 fiscal stimulus deal that, as of this writing, removes two of the most contentious moral hazards (liability protection for businesses and non-Covid state aid) from the bill, shrinking the package from $908 billion to $750 billion. Congress wants to return home for Christmas this weekend, but Senate Majority leader McConnell and House Speaker Pelosi are motivated by their own political survival to get this done now rather than next January.
  • Tesla arrives to the S&P 500 Index after Friday’s close. With a market cap of $600 billion, it will be the sixth-largest company in the index and the largest stock ever added to it. The electric car maker is nearly a 10-bagger since the market’s bottom in March, surging from $70 then to $654 last week, the last $250 of which came after the S&P announced Tesla would joining the index. This could open the door for arbitrageurs and hedge funds to lock in outsized profits in coming days.
  • No-deal Brexit looms. Yes, we’re still talking about this nearly five years later, as United Kingdom Prime Minister Boris Johnson has been unable, to date, to negotiate favorable terms for the U.K.’s likely hard Brexit from the European Union.
  • Georgia still on our minds. The two Jan. 5 U.S. Senate runoff elections in the Peach State will determine the legislative balance in Washington. Stocks have rallied hard since the end of October, as investors thought the dreaded Blue Wave was dead. But if the two Democratic underdogs win, that will deadlock the Senate at 50-50, allowing Vice President-elect Kamala Harris to break all ties.  

All of the above represent nits amid a broad range of positives that we now expect will lift the S&P to 4,500 next year and 5,000 in 2022, up from our previous targets of 4,200 and 4,600. As we’re sticking with our projected 3,800 for year-end, this implies a total return potential of 20-25% over the course of next year. Among the factors driving our bullish outlook: 

  • Vaccine rollout Distribution of Pfizer/BioNTech’s vaccine already is underway in the U.S. and U.K., and we expect that Moderna and Oxford University/Astra Zeneca won’t be far behind. The experts assure us that we’ll be vaccinating 50 million Americans each month, but even at half that pace, we’ll be approaching herd immunity by midyear. As a result, this extraordinary vaccine progress will help to boost business and consumer confidence, normalize economic activity, increase hiring and spending, and ultimately increase economic and corporate profit growth.
  • Easy year-over-year comps Economic and corporate profit growth will be very easy to beat for the next few quarters, which will help to boost stock prices.
  • Fed anchored at zero Chair Powell has assured us that the fed funds target rate will remain zero-bound through at least 2022. Even though his term as chair is up for renomination in 13 months (January 2022), we see no cause for concern on rates during calendar 2021.
  • Newfound cooperation in Washington With President-elect Biden’s inauguration on Jan. 20, his honeymoon with House Democrats is likely to include the generous fiscal stimulus and infrastructure spending that President Trump was unable to secure. That sugar high should help boost the powerful cyclical recovery that’s been underway since the recession ended in May or June of this year.

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Tags 2021 Outlook . Equity . Markets/Economy . Active Management .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Diversification and asset allocation do not assure a profit nor protect against loss.

PRISM® is a registered trademark of FII Holdings, Inc., a subsidiary of Federated Hermes, Inc.

Stocks are subject to risks and fluctuate in value.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Value stocks may lag growth stocks in performance, particularly in late stages of a market advance.

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