December 29, 2020
We’ve held a bullish equity outlook since credit spreads narrowed in late March. Our bullish outlook was based on a strong belief that unprecedented liquidity (monetary and fiscal channels) would outlive the pandemic and strong corporate balance sheets would be able to absorb a temporary earnings hit. In the months that followed, equity sentiment reached bearish record extremes on three separate occasions, every equity positioning indicator was at record lows and our bullish conviction grew as a result. Equity sentiment is now bullishly elevated and positioning indicators are no longer underweight equities, but we’re keeping our bullish outlook (6-12 months) based on the realization of unprecedented liquidity outliving the pandemic. Other positive include a healthy US consumer, weaker dollar and a record ~2.3T in corporate cash to be used for M&A, shareholder return (stock buybacks and dividends) and capex. The non-fundamental short-term issues around sentiment and positioning are reasons to be more selective when adding exposure. In mid-September, we shifted our emphasis to cyclical/value sectors (Industrials, Financials and Materials) based on the apparent cessation of secular growth stock multiple expansion. We also advocate adding value stocks within growth sectors like Consumer Discretionary, Health Care and Tech.