March 5, 2021
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
After abating slightly over the past week, the surge higher in interest rates is continuing today with the US 10 year Treasury yield up to 1.55%. This is spurring an additional pullback in equities, pushing the S&P 500 below its 50 day moving average. The next level of nearby technical support on the S&P 500 is 3694, followed by the 3500-3600 area (horizontal support levels and near the upward-trending 200 DMA). We reiterate our view that rates are rising for the right reasons, as the economic outlook improves rather than tightening monetary conditions. An improving economy is good for equity markets. Credit spreads continue to trend lower (reflecting a healthy corporate backdrop), and the Fed has not wavered in its dovish stance.
While the pace of the move higher in rates is unsettling equities in the short term, pullbacks are normal. The S&P 500 is now 5% below its highs for the first time since early November. And the 200 DMA at ~3500 would be ~11% from highs. Importantly, the short term volatility has not changed our positive view on equities for the year ahead, resulting in better upside over the longer term. Accordingly, we would use the pullback as an opportunity to accumulate favored sectors and stocks.
Following a low base of -3.5% real GDP growth last year, along with unprecedented levels of both fiscal and monetary stimulus, economic growth in a reopening this year could be the strongest in decades. With an estimated ~$3.5T in fiscal stimulus committed already, and a likely $1.5-1.9T coming in the next month, fiscal stimulus alone is set to approach 25% of nominal GDP since the pandemic began. With the Fed also remaining accommodative, this stimulus could result in GDP growth well above current consensus estimates of 4.4% in our view. US real GDP growth has not reached 5%+ since 1984, and we believe 2021 could be closer to 6% if our expectations on the economic reopening and fiscal stimulus come to fruition.
If GDP growth approaches a level closer to 6%, we believe earnings could finish 2021 closer to $190 (~37% growth y/y) vs current consensus estimates of $173. In fact, the current 2021 estimate revision trend has been closely correlated to 2010 estimates (out of the credit crisis), as analyst estimates are typically too low out of recessions. If this trend holds through year end, S&P 500 earnings should finish near $185. Valuation is extended with the S&P 500 P/E at 26.5x but will begin to normalize as earnings recover. And while rising rates (given the sharp pace) can remain a headwind to equities in the short term as they continue to rise, we view the pullback as a buying opportunity for the longer term as multiple contraction should not outweigh earnings growth in the year ahead.
IMPORTANT INVESTOR DISCLOSURES
This material is being provided for informational purposes only. Expressions of opinion are provided as of the date above and subject to change. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Links to third-party websites are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate, or commercially exploit the information contained in this report, in printed, electronic, or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret, or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec. 501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.
The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.
MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.
MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index's three largest industries are materials, energy, and banks.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
For clients in the United Kingdom:
For clients of Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (high net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended)or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Investment Services, Ltd.: This document is for the use of professional investment advisers and managers and is not intended for use by clients.
For clients in France:
This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in "Code Monetaire et Financier" and Reglement General de l'Autorite des marches Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorite de Controle Prudentiel et de Resolution and the Autorite des Marches Financiers.
For institutional clients in the European Economic rea (EE ) outside of the United Kingdom:
This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.
For Canadian clients:
This document is not prepared subject to Canadian disclosure requirements, unless a Canadian has contributed to the content of the document. In the case where there is Canadian contribution, the document meets all applicable IIROC disclosure requirements.
Securities are: NOT Deposits • NOT Insured by FDIC or any other government agency • NOT GUARANTEED by the bank • Subject to risk and may lose value
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Raymond James Financial Services, Inc., member FINRA/SIPC. Raymond James® is a registered trademark of Raymond James Financial, Inc.