We don’t think it’s lost on anyone the obvious reasons for the melt-up that is occurring in financial markets: couple a vaccine that works with a takeover of the Senate and the inauguration of a presidential administration that seems intent on seeing just how far an MMT experiment can go.
Relentless money printing will stoke the growth in paper assets, even when the velocity of that money is weak from the pandemic. The stimulus and infrastructure hopes are also getting investors to believe in the cyclical story as outperformance is accelerating.
While the most logical path is to follow the helicopter money into overweighting stocks—markets are not logical—and we are more concerned with the overbearing sentiment of optimism and are instead choosing to raise cash here. Though we feel short-term risk/reward is poor, our year-end price target is 4150 for the S&P 500.
Our top conviction, though it is more consensus than we prefer, is the Dollar ends up lower on the year. We are experiencing a wealth effect on steroids, and with direct payments galore, rent paused, and all-time highs in markets—things you can touch and feel should march higher. With a conviction on hard assets, we continue to love anything to do with housing and believe, with the debt bubble, the Fed now has no choice but to keep rates low.
A reflation trade will finally lead to an end in falling interest rates and commodity prices. With rising commodity prices, industrials and basic material stocks will be able to use cheap money to leverage their returns and outperform.
On the international front, we prefer equities in Latin and South America because they have heavier weightings in these areas.
We expect the recovery to be weaker in the 1 quarter than expected because of new lockdowns and people holding out to get the vaccine now that there’s light at the end of the tunnel. We expect the most at-risk population to be completely vaccinated by the end of March and all economies to be reopened spurring massive travel and leisure spending.
That being said, we think business travel will continue to languish as companies have found more efficient ways to engage and enjoy spending less.
The consensus is the Fed is out of the picture for at least the next 18 months, but with the 10-year doubling since August and fiscal policy seeming ready to print more money than anyone can imagine, we wonder whether they won’t be needed sooner for some sort of yield-curve control as we are in a situation where we, the country, simply can’t afford for rates to normalize.
Disclosures: Securities and advisory services offered through Centaurus Financial, Inc., member FINRA and SIPC, a registered investment advisor. Centaurus Financial, Inc. and First Franklin Financial Services are not affiliated companies. This presentation is for educational purposes only and is not intended for investment advice or a solicitation of services.