While our prediction that President Trump would be re-elected missed the mark, our prediction that stocks would rally if Vice President Biden won has mostly proven accurate. Further, our prediction that, regardless of the outcome, half of the country would be disappointed was spot on. No prediction was tied to political policies as much as investor behavior. With investor anxiety ahead of the election so thick it could be cut with a knife, we expected a sense of relief to lift stocks after November 3.
Many investors have viewed Trump as “pro market” and Biden as “market negative”. Well, as contrarians, we are constantly taking the “temperature” of investors and position our client portfolios to avoid the “herd”. Rarely is it the case that extremes in sentiment represent market reality and this election did not do anything to change our view.
As a result, the market’s rally following the presumptive victory by Biden feels “right” to us. We think it continues through the end of the year. Some of this rally comes from an unwinding of “fear trades” placed ahead of the election. Some of the rally comes from a relief that the election is (mostly…) over. Some of it comes from the expectation that a vaccine is “around the corner.”
As we have discussed in previous missives, our bullish outlook will shift to short-term bearish when the COVID vaccine is released. There is no denying the vaccine will be a positive for not just millions, but billions around the world. With a “post-COVID” reality around the corner, many investors are growing enthusiastic that the market will return to “normal” soon.
As contrarians, we view this consensus as negative for stocks in the short term. Sentiment and stocks are setting up for a classic “Buy the rumor, sell the news” event. So, while we join in the optimism of a vaccine when it comes to lives being saved and life returning to normal, we are weary that stocks will falter.
It is our expectation that leadership in the market will shift from the COVID stay-at-home stocks to the post-COVID recovery stocks. This means stocks that benefited from the dramatic shift in consumer and business behavior will give way to those who will benefit from the shift back to “normal.”
We do not want to overstate our view that stocks will decline after the vaccine is released. A drop of 15%+ is what we expect, but it will set up for a tremendous buying opportunity if it occurs. A shift in leadership is not the same as a decline in economic activity. In fact, we see a strong recovery ahead and stocks should rally over the next several years. Corporate profitability, consumer confidence and many other factors will likely propel stocks to many more all-time highs in the future.
In anticipation of this shift in leadership, we have removed many of the “COVID” stocks from client portfolios in favor of “value” and “cyclical” stocks. This means we have decreased our exposure to the mega-cap technology stocks that rallied strongly after March in favor of large-cap industrials, materials, energy, chemical and health care stocks that have lagged in performance.
So, we think stocks are set up for fresh all-time highs into the end of the year. While this enthusiasm for the vaccine will lift stocks for a while longer, we expect reality to set in and weakness to follow as a change in stock leadership takes place. As investors recognize that no further government stimulus is coming, they will shift to companies that benefit from an economic recovery rather than stay-at-home behavior. They will also move to lock in the tremendous gains achieved in many stocks and turn their attention to new leadership. This transition in leadership will lead to lower stock prices before the bull market resumes.
Kessler Investment Group, LLC
All information above is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic performance data is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Certain statements contained within are forward looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please consult your adviser for further information.
Opinions shared are not intended to provide specific advice and should not be construed as recommendations for any individual. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.