Eq: Total Market
With the calendar flipping to 2021, the big question on everyone’s mind is what 2021 will hold. 2020 was an exceptionally wild, and ultimately very profitable, year for investors. And within the final few months of 2020 was a developing buy signal that rarely occurs. That signal was the constant revision of earnings estimates in an upward direction. Remember that analysts’ earnings estimates are very frequently revised just before earnings are released, and the large majority of the time those revisions are towards the downside. However, in nearly every week of Q4, revisions moved estimates higher. According to Jefferies, “We’d argue that this is one of the most important tailwinds for equities, as earnings revisions are rarely positive”.
FINSUM: Revising earnings upwards breaks almost all rules of the equity research game, so when it happens it is quite notable. This suggests some strongly positive momentum for the economy.
Make no mistake, in the long run Morgan Stanley is bullish. The problem is that the short-term does not look so bright, according to the bank. While MS raised their S&P 500 target for 2021 to 3,900 (well above today’s 3,350 level), they think the market might be rough in the near term. Citing “the second wave of virus, remaining election uncertainties and the specter of higher rates”, the bank says prices will swing from as low as 3,150 to 3,550 in the short-term. According to Morgan Stanley, “Once sentiment turns from euphoric bullishness, reality will strike and we expect to see the S&P 500 begin to feel the pressure”.
FINSUM: The bank says that without the vaccine news, the market would have fallen 5% already and they basically think that fall is due at any moment.
The market has been turned on its head. For the last nine months there has been a clear delineation in the market: stocks that benefit from work-from-home and other social distancing measures thrive, and those shares which did well in the “old” economy struggle. Yesterday, that got turned upside. The market surged on the most legitimate and detailed announcement of vaccine success yet, and that sparked a reversal of fortune for WFH stocks. Despite the Dow rallying almost 5%, the Nasdaq fell well over 1%, showing the strong divergence in shares. Stocks like Boeing, Raytheon, GE, American Airlines, and Delta Airlines rocketed, often jumping by 15% or more. The cruise lines were up by as such as 40%! But the big winners of the year—like Zoom—fell big-time, with Zoom’s shares down 17%.
FINSUM: If you were short the COVID-economy yesterday you did very well. The thing is, this market seems to be getting a little ahead of itself because of the fairly long timeline for approval and distribution of the vaccine.
A top Wall Street research team at BTIG has just said that 2021 is going to be a strong year for markets. They view the current volatility in equities as a good buying opportunity. In either a Trump or Biden win, the economy is probably going to receive additional COVID stimulus, as well as further spending, such as an infrastructure bill. Investors are so focused on the risks associated with the election that they have lost sight of the fact that either outcome will likely be positive for the economy and markets.
FINSUM: We tend to agree with this view, even though it is simplistic. In either outcome, both sides of the aisle will probably be served by being more collaborative than at present, so more economic stimulus is coming.
Polls have Biden well ahead of President Trump at the moment. In fact, some pollsters say that Biden is further ahead leading up to election day than any candidate in the last 20 years. Markets have somewhat followed this and are clearly anticipating a Biden victory. That said, there is almost nobody who doesn’t think the race will be very close. So, how to play it if Trump surprises the markets and wins? Three sectors seem like they would benefit most strongly: traditional energy companies, defense companies, and large-cap banks. Trump’s light-touch regulatory approach would help energy companies and large banks, while defense spending would probably continue to rise under Trump.
FINSUM: Most agree that if Trump surprises, the market is not going to shoot higher like it did in 2016, primarily because there is not a big proposed tax cut.
There has been a big change of opinion for investors over the last two weeks or so. For almost all of this year, a Biden victory, and especially a blue sweep were seen as potential negatives for the economy vis-à-vis a Trump reelection. Any gains in the polls for Democrats was seen as a negative for the economic outlook, particularly because of the chance for higher taxes. However, the rising odds for a blue sweep have managed to assuage an even bigger fear for investors—a contested election that could drag on for months. Accordingly, gains in the polls for Democrats have seen rising markets. Goldman Sachs feels strongly enough to say this: “All else equal, a blue wave would likely prompt us to upgrade our [US economic growth] forecasts”.
FINSUM: We think there are two specific reasons perceptions have changed. Firstly, the decreased chances for a contested election (very arguable if that is actually true); and secondly, the odds for bigger stimulus and infrastructure packages, which would be positive for the economy.