Market Analysis

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According to Bank of America’s research team, with the current levels of the S&P 500 it is signaling a good time to move money from equities and into cash. Here is the latest exerpt from their research team.

‘New highs risky amid divergences and weak seasonality

Our technical work has suggested raising cash into the 4400s on the S&P 500 (SPX) and toward 15,000 on the NASDAQ 100 (NDX) given lower highs (aka bearish divergences) across a variety of indicators as the SPX moves into its weakest 3-month period of the year of August-October. See our Indicator checklist in Table 1 below and recent reports titled August = Gateway between summer rip and fall dip, New SPX highs look risky and Bearish divergences everywhere = tactical correction risk for more details.’

Presidential Cycle moves into its weakest period

The SPX is off to a great start for the Biden presidency with a 17% rally through July that has outpaced the average Presidential Cycle. However, the Presidential Cycle has its weakest period with the risk for a corrective phase for the SPX from July/August of Year 1 into 3Q of Year 2 (aka the mid-term year). This is aligned with the lackluster second year return for a recession Golden Cross.

Bank of Americas equity researcher Savita Subramanian targets 3,800 by year-end 2021. While she believes the recovery is intact and expects a robust upturn in 2H21, the near-term risk is skewed to the downside as a lot of optimism is already priced in the market with elevated valuations, increased optimism, and peak liquidity. While not our base case, a pullback in the economy amid spreading of the COVID Delta variant also poses risks. We remain bullish on high quality as a defensive hedge, Small caps, Value, capex beneficiaries over consumption, and GDP-sensitive/inflation stocks.

Read more here: Click Here for BofA’s Research Report

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Market Moves

Increasing our overweight to equities by 1%, targeting exposure to cyclically sensitive assets that appear to have the most attractive risk/reward profiles in a recovery regime.

Leaning into energy stocks on a tactical basis, seeking to benefit from oil and gas’ asymmetric exposure to accelerating economic growth prospects and historical efficacy as a hedge against oil supply shock-induced market drawdown risks.

Trimming growth to add to value within our non-US Developed Market equities sleeve, consistent with the overall recalibrating of the growth v. value ballast across our portfolios.

Shortening duration by selling longer-term investment grade bonds and US treasuries and adding cyclicality through increasing exposure to “fallen angels” (i.e., investment grade bonds that have been downgraded to high yield).

TRADE RATIONALE

In our view, market participants and analysts are still underestimating the near-term prospects for potentially rapid economic expansion and robust corporate earnings growth that may result from successful vaccination efforts, easing social distancing mandates, and downstream stimulus impulses. As such, we believe analyst earnings estimates and price targets may be revised higher over the coming quarters; events that have historically proven to be some of the most potent catalysts for driving stock prices higher.

Given this possible disconnect between market expectations and reality, we expect the rally in small cap, value, and cyclically oriented stocks to continue. These are the companies most vulnerable to negative Covid-19 shocks but favorably positioned to take advantage of a return to normalcy due to the cost controls implemented during the recession and disproportionate exposure to pent-up consumer demand.

Consistent with this theme, we believe there is a potentially attractive tactical opportunity to add exposure to energy stocks, where investors currently may be underweight. Historically, energy stocks have tended to perform well during economic recoveries and in inflationary environments. Furthermore, with much of the downside likely priced-in following years of excess capacity, poor price returns, and low growth macroeconomic backdrops, energy stocks are trading at attractive historical valuations and may be positioned to surprise to the upside as direct beneficiaries of a potentially synchronized global economic recovery.

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OVERVIEW

Pivoting towards more inflation-resilient securities:

By moving away from duration-based assets and adding more focus on real assets and stocks.

Allocating more to commodities:

Investing in more global financial stocks and value-oriented stocks within Developed Markets. These are funded through fixed income with long dated investment grade credit.

Reorientation towards global financial stocks:

Steepening yield curves, trading activities and flexible balance sheets support a healthy portfolio.

TRADE RATIONALE

Although the Federal Reserve have cautioned against expectations of high inflation, most participants in the market are still skeptical of their statements.

Economic growth will continue to expand further, perhaps running the economy too hot, as the expansionary policy continues.

The Federal Reserves Goal of average inflation will likely continue the expansionary policy of the economy in order to allow unemployment to return to normal levels previous to the pandemic and recession.

As the pandemic regulations begin to loosen, travelers will once again continue to drive tourism and business. With the resuming of global trade, current supply and demand imbalances seem to indicate the upwards inflationary pressures are present.

Considering the uncertainly of current and future market conditions, allocation towards fixed income and inflation-resilient securities.

Across global markets, there is an expectation the nominal yield curves to steepen, particularly in North American and European Markets, as a result of accelerating economies, consumer demand, and a surplus of liquidity.

The important considerations emphasizing healthy a balance sheet and limits on excess capital.

 

This information should not be relied upon as investment advice, research, or a recommendation by BlackRock regarding (i) the Funds, (ii) the use or suitability of the model portfolios or (iii) any security in particular. Only an investor and their financial professional know enough about their circumstances to make an investment decision.

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