Stocks are vulnerable to a near-term pullback as the market overestimates a 2021 recovery, CFRA says

NYSE Trader worried red
A trader works on the floor at the New York Stock Exchange (NYSE) in New York, U.S., February 28, 2020.

  • Investors should brace for a near-term pullback in the first quarter of 2021, according to CFRA’s Sam Stovall. 
  • Domestic equity markets appear to us to have over-discounted a second-half 2021 economic and EPS recovery…and as a result may be vulnerable to a Q1 pullback,” the chief investment strategist said in a note to clients on Wednesday.
  • Stovall also sees the S&P 500 reaching 4080 by the end of 2021, a 9.5% upside from current levels.
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Investors should brace for a near-term pullback in the first quarter of 2021, according to CFRA’s Sam Stovall. 

Positive vaccine news has left many investors hopeful that the economy will reopen and recover during the summer of 2021. Stovall explained that the market now is showing signs that investors are overestimating a recovery in the economy and earnings in the second half of 2021. 

“Domestic equity markets appear to us to have over-discounted a second-half 2021 economic and EPS recovery…and as a result may be vulnerable to a Q1 pullback,” the chief investment strategist said in a note to clients on Wednesday. 

Read more: JPMorgan unveils its 50 ‘most compelling’ stock picks to buy for 2021 – and details why each one will be a top performer

Stovall noted that the Russell 2000 is currently more than 30% above its 200-day moving average, and the 12-month return differential for the S&P 500 growth-value indices remains at a level not seen since December 1999, shortly before the “Dotcom” bubble burst. 

However, the chief strategist sees the S&P 500 gaining 9.5% in 2021. He reiterated his 12-month price target for the benchmark index of 4080, a sign that 2021 will be a positive year for stocks.

Stovall recommends investors stay overweight consumer discretionary stocks, health care, industrials, and materials. He recommends investors are underweight utilities, real estate, and consumer staples.

Read more: Wall Street’s biggest firms are warning that these 7 things could crash the stock market’s party in 2021

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Fundstrat’s Tom Lee says another epic rally in stocks hit hardest by COVID-19 could be coming soon

Hilton Hotel
  • Fundstrat’s Tom Lee said stocks in sectors hit hardest by the pandemic like travel and retail may be due for a rally. 
  • The head of research explained that the third wave of COVID-19 cases may be peaking in the US. When this happened after the second wave, epicenter stocks rallied shortly after, he said.
  • “From a market’s perspective, a rolling over of COVID-19 should be a “risk-on” signal for epicenter stocks,” said Lee. “The reason, naturally, is that epicenter stocks are more sensitive to lockdowns and benefit from economic re-opening.
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History shows that another rally for stocks hit hardest by the pandemic could be on the way. 

That’s according to Fundstrat’s Tom Lee, who wrote in a note to clients on Monday that “epicenter stocks,” or stocks in sectors like travel, retail, and services, could be poised to gain in the near future. 

The head of research explained that the third wave of COVID-19 cases may be peaking in the US. When this happened after the second wave, epicenter stocks rallied shortly after, he said. 

“From a market’s perspective, a rolling over of COVID-19 should be a “risk-on” signal for epicenter stocks,” said Lee. “The reason, naturally, is that epicenter stocks are more sensitive to lockdowns and benefit from economic re-opening. Hence, we should expect the epicenter stocks to rally.”

Read more:RBC unveils its 15 top biotech stock ideas for 2021 as the sector is poised to take off on the back of pandemic-related innovations and new funding

Lee said that the percentage of the US with declines in COVID-19 cases is at 62%. That’s the highest level since August. He also noted a recent comment from former FDA commissioner Dr. Scot Gottlieb, who said on Sunday that COVID-19 cases may be peaking nationally. This thinning out of cases could be a good sign for stocks that hinge on an economic reopening. 

Although this could be a temporary rollover of cases, and holiday gatherings could cause a spike in cases, Lee said COVID-19 is still rolling over earlier than he expected.  

Names in his basket of epicenter stocks include travel companies like MGM Resorts, Hilton Worldwide, Marriott, Norwegian Cruise Line, and Royal Caribbean, retailers including AutoNation, Harley-Davidson, Hasbro, L Brands, and Best Buy, and restaurants like Darden Restaurants and Starbucks.

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