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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Markets have had their ‘Santa Claus rally’ but a strong economy could drive stocks even higher, veteran Wall Street bull Ed Yardeni says

Ed Yardeni
  • Stock markets had an early “Santa Claus rally” in November, but veteran bull Ed Yardeni believes there’s more to come next year.
  • “November was one of the best months ever for the market,” the Yardeni Research boss told CNBC. “It broadened quite dramatically the small-cap and mid-cap stocks. It was just a great, great month for the market.”
  • The disappointing November jobs report shouldn’t worry investors, according to him, because it suggests the first quarter will avoid a double-dip recession.
  • Coordinated global monetary policy will continue to enable a bullish backdrop for stocks, he said.
  • Visit Business Insider’s homepage for more stories.

Stock markets may have massively outperformed in November, but expansionary monetary policy could drive them even higher next year, longstanding bull Ed Yardeni told CNBC.

“The market already had its Santa Claus rally,” he said on CNBC’s “Trading Nation.”

“But it just keeps going up anyways, and no matter how much you try to look at it fundamentally, I think the fact is there is so much liquidity with interest rates so low driving the market higher.”

The benchmark S&P 500 index ended November up 11.8%, notching its best monthly performance in 33 years. Its gains reflected optimism around COVID-19 vaccine development and a resolution to US presidential election uncertainty.

“November was one of the best months ever for the market,” Yardeni said. “It broadened quite dramatically the small-cap and mid-cap stocks. It was just a great, great month for the market.”

However, a record number of coronavirus cases in the US and the disappointing jobs report for November is fuelling concerns over the pace of economic recovery. US employers added only 245,000 jobs in November, far lower than the 460,000 expected.

Yardeni, however, believes a ‘V’-shaped recovery is in progress.

Read More: Goldman Sachs says buy these 19 beaten-down stocks on its ‘holiday shopping list’ that are poised to break out in the 1st quarter of 2021

“I really wasn’t that disappointed,” he said of the jobs figure. “Government had a drop of almost 100,000 [payrolls] because census workers just had part-time jobs. Excluding that, we were up over 300,000. Wages were up, and the workweek held up pretty well.”

Not only does he believe the US economy will bounce back sharper by spring next year, but that global monetary policy will enable a bullish backdrop for stocks.

“You’ve got the major central banks just pouring liquidity,” he noted. “I’m not just watching the Federal Reserve balance sheet every week. I watch the ECB, and the Bank of Japan. They’re all continuing to expand their balance sheets.”

Aside from his optimism for the stock market, he recognized the need for further federal aid for individuals and businesses that endured the worst of their fears this year.

“There are a lot of people who have been left behind,” he said. “Either they lost their jobs and now are being threatened with possibly losing their unemployment insurance. And then, of course, there are a lot of businesses who barely survived the first and second waves of this pandemic.”

Read More: Billionaire investor Ray Dalio breaks down how US debt and money-printing binges have formed a ‘classic toxic mix’ that could set it on a downward spiral towards revolution and civil war

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