It's all bullish
Election outcome 1 of 5 reasons risk assets are on a tear.
We remain overweight stocks and added again this morning in our most tactical allocation portfolios, with a continued preference for value/cyclical names through next year. All the uncertainties holding back stocks, especially “value” names, have been dropping like flies in the last few days: the election, the coming of the Covid vaccine and the cyclical recovery in the economy. We may have to move forward our year-end S&P 500 target to 3,800; our 3-year target remains very optimistic at 5,000.
- Divided we stand. Last week’s election outcome was really a Goldilocks scenario for the markets. Divided government means we are likely to get more fiscal spending, the one thing both sides probably can agree on, but no growth-impeding tax hikes and other progressive agenda items. Though the Senate could still go to a 50-50 tie should the Democrats take both Georgia runoff elections, that outcome seems improbable and even if it happened, the very slimmest control of the upper chamber by the Democrats would insure that a radical left policy shift would be unlikely.
- Covid will end, maybe sooner not later. Today’s news, which we’ve been anticipating, likely marks the beginning of a much more positive news cycle on Covid developments. Though the third wave is upon us, markets will continue to be cheered by the weaker rise in death counts from Covid that we’ve been experiencing of late. Moderna’s vaccine new, based on a similar technology to Pfizer’s, is coming soon and will pile on to the growing optimism that ending Covid is a matter of when, not if. Certainly “when” is within the market’s normal discounting horizon, i.e., at least within the next six months.
- The economy is recovering sharply. Last week’s jobs, manufacturing and services news was also positive, and the momentum of the bounce coming out of the spring lockdown is continuing to be very strong. With politics and Covid taking a back seat, business and consumer confidence should continue to surge and create a self-reinforcing upward loop.
- The Fed is on hold. Even while all the news above is good, the Fed is on record as staying on hold at this stage of the recovery. Unemployment, though declining rapidly, remains well above target, and inflation remains well below. With other global central banks similarly on board, the easy-money backdrop for stocks is extremely attractive.
- Year-over-year (y/y) earnings comparisons are about to look very good.While the Q3 reporting season was terrific in terms of performance versus expectations, on balance, the y/y numbers were still negative in many names, albeit less bad than consensus. However, as we enter 2021, comparisons are going to start moving sharply higher, especially for older economy/cyclical/travel/value names that experienced a virtual shutdown in the spring of 2020. We began closing underweights to these sectors and stocks in the late summer in our portfolio models and are now overweight in them. The growth names that have carried markets to this point remain attractive on a 3-year view but now are likely to take a back seat as near-term y/y comparisons will be more difficult for them.