Eq: Total Market
For those paying attention, ESG has had a great run over the last year. While many may feel that in an intangible way, the real world results are strong too, with ESG investments outperforming the S&P 500 by 1.3% in 2020. ESG investment experienced some solid outperformance early in the pandemic because if its natural defensive. Millennials appear to be driving the trend, which seems likely to only increase. More generally, the environment has become a major focus for both retail investors and major asset managers, like BlackRock, which has helped make the sector mainstream.
FINSUM: Our best call for ESG is that it will do great in 2021. The main reason being that the Biden administration is bringing a strong and renewed focus on the environment, which will both awaken public consciousness but also give ESG some favorable regulatory tailwinds.
Goldman Sachs has been one of the biggest bulls on the street so far in 2021. The bank is calling for 6.6% GDP growth and a strong year for the S&P 500. However, in the last week they have been backtracking a bit and pointing out some of the key risks to the economy and market. Whether or not investors like it, Goldman has a very clear risk risk—COVID variants. The bank says that if the new variants make the current vaccine ineffective, then all bets for the market are off. Based on the current science, that seems unlikely to happen. But nonetheless, there are intermediate risks, such as the new variants slowing down herd immunity or making consumers more fearful about going out/spending/the economy, both of which could have unforeseen negative consequences on the economy.
FINSUM: The new virus strains are a big risk. While the current vaccines don’t seem likely to be rendered useless, consumer fear of the new variants could slow down the recovery. Notably, Goldman says its baseline forecasts don’t include any of these eventualities.
Goldman Sachs has been leading Wall Street in its bullish outlook for 2021. The bank has been forecasting 6.6% GDP growth, a full 2.5% above the consensus forecast. However, the bank just published a note which represents the first backtrack on that call. The bank pointed out that the new strains of COVID could pose a risk to growth. In particular, they explained that if the current vaccines do not give a high degree of protection against the new COVID strains, then the spending boom which they forecasted this year might be delayed to 2022. In the bank’s own words, if the new strains require a new vaccine “Virus-sensitive spending would likely retrench while a new vaccine is developed, and although a new vaccine could be approved in less than five months, the consumption boom would likely be delayed until 2022”.
FINSUM: We are sure they made this admission with some frustration as GS has been quite bullish. That said, they did so because it is very realistic. It should be noted that most authorities say that the current vaccine should cover the new strains.
With the calendar flipping to 2021, the big question on everyone’s mind is what 2021 will hold. 2020 was an exceptionally wild, and ultimately very profitable, year for investors. And within the final few months of 2020 was a developing buy signal that rarely occurs. That signal was the constant revision of earnings estimates in an upward direction. Remember that analysts’ earnings estimates are very frequently revised just before earnings are released, and the large majority of the time those revisions are towards the downside. However, in nearly every week of Q4, revisions moved estimates higher. According to Jefferies, “We’d argue that this is one of the most important tailwinds for equities, as earnings revisions are rarely positive”.
FINSUM: Revising earnings upwards breaks almost all rules of the equity research game, so when it happens it is quite notable. This suggests some strongly positive momentum for the economy.
Make no mistake, in the long run Morgan Stanley is bullish. The problem is that the short-term does not look so bright, according to the bank. While MS raised their S&P 500 target for 2021 to 3,900 (well above today’s 3,350 level), they think the market might be rough in the near term. Citing “the second wave of virus, remaining election uncertainties and the specter of higher rates”, the bank says prices will swing from as low as 3,150 to 3,550 in the short-term. According to Morgan Stanley, “Once sentiment turns from euphoric bullishness, reality will strike and we expect to see the S&P 500 begin to feel the pressure”.
FINSUM: The bank says that without the vaccine news, the market would have fallen 5% already and they basically think that fall is due at any moment.
The market has been turned on its head. For the last nine months there has been a clear delineation in the market: stocks that benefit from work-from-home and other social distancing measures thrive, and those shares which did well in the “old” economy struggle. Yesterday, that got turned upside. The market surged on the most legitimate and detailed announcement of vaccine success yet, and that sparked a reversal of fortune for WFH stocks. Despite the Dow rallying almost 5%, the Nasdaq fell well over 1%, showing the strong divergence in shares. Stocks like Boeing, Raytheon, GE, American Airlines, and Delta Airlines rocketed, often jumping by 15% or more. The cruise lines were up by as such as 40%! But the big winners of the year—like Zoom—fell big-time, with Zoom’s shares down 17%.
FINSUM: If you were short the COVID-economy yesterday you did very well. The thing is, this market seems to be getting a little ahead of itself because of the fairly long timeline for approval and distribution of the vaccine.