by Scott Martindale
  President & CEO, Sabrient Systems LLC

Monthly commentary on the economy, inflation, Fed policy, stock valuations, global events, Sabrient’s SectorCast rankings, sector rotation model positioning, and top-ranked ETF ideas.

Summary:

1. I remain skeptical of the official, government reports on jobs, GDP, and inflation, which are not passing my “smell test” and what I consider to be the illusion of a robust economy and jobs market, as GDP and jobs growth have been overly reliant on government deficit spending and hiring, which is both unhealthy and unsustainable.
    
2. Rising asset prices have been largely driven by a strong dollar, rising global liquidity, and capital flight into the US (most of which does not show up in M2 money supply), which comes at the expense of the rest of the world’s growth. It also creates a “wealth effect” here that lifts US consumer price inflation even though global supply chain pressures are low.
    
3. Somewhat elevated inflation in the 2-3% range can be desirable to help address our enormous federal debt as part of a 3-pronged attack:  inflate away the debt, cut government waste and spending, and grow our way out of debt by stimulating organic private-sector-led productivity and economic growth with business-friendly Trump 2.0 fiscal policy and deregulation.
    
4. Overall, Trump 2.0 policies combined with a dovish Fed should be good for stocks, but bond prices will be more stagnant, in my view, with yields staying around current levels. I continue to suggest investors buy stocks in high-quality businesses at reasonable prices, hold inflation and dollar hedges like gold and bitcoin, and be prepared to exploit any market correction for further gains through 2025 and beyond, fueled by massive capex in blockchain and AI applications, infrastructure, and energy.
    
5. Sabrient’s latest fundamental-based SectorCast quantitative rankings of the ten U.S. business sectors is topped by Technology, Financials, and Consumer Discretionary. I also discuss the current positioning of our sector rotation model and several top-ranked ETF ideas.
    
6. Sabrient is best known for our “Baker’s Dozen” portfolio franchise and our process-driven, growth-at-a-reasonable-price methodology, which Sabrient founder David Brown describes in his latest book, How to Build High Performance Stock Portfolios, along with his value, dividend, and small cap portfolio strategies.

   Each Baker’s Dozen is designed to be held for 15 months as a unit investment trust. Notably, although the mega-cap-dominated S&P 500 has been so tough to beat, the next Baker’s Dozens to terminate will be the Q4 2023 portfolio on 1/21, which is up about +49% (vs. +47% for SPY), and the Q1 2024 portfolio on 4/21, which is up about +95% (vs. +27% for SPY), as of 12/6.

   To learn more about both the book and the companion subscription product we offer (which does most of the stock evaluation work for you), please visit: https://DavidBrownInvestingBook.com

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  by Scott Martindale
  President & CEO, Sabrient Systems LLC

By some measures, the month of November was the best month for global stock markets in over 20 years, and the rally has carried on into December. Here in the US, the S&P 500 (SPY) gained +12.2% since the end of October through Friday’s close, while the SPDR S&P 400 MidCap (MDY) rose +18.1% and the SPDR S&P 600 SmallCap (SLY) +24.3%. In fact, November was the biggest month ever for small caps. Notably, the Dow broke through the magic 30,000 level with conviction and is now testing it as support. But more importantly in my view, we have seen a significant and sustained risk-on market rotation in what some have termed the “reopening trade,” led by small caps, the value factor, and cyclical sectors. Moreover, equal-weight indexes have outperformed over the same timeframe (10/30/20-12/11/20), illustrating improving market breadth. For example, the Invesco S&P 500 Equal Weight (RSP) was up +16.9% and the Invesco S&P 600 SmallCap Equal Weight (EWSC) an impressive +29.5%.

As the populace says good riddance to 2020, it is evident that emergency approval of COVID-19 vaccines (which were developed incredibly fast through Operation Warp Speed) and an end to a rancorous election cycle that seems to have resulted in a divided federal government (i.e., gridlocked, which markets historically seem to like) has goosed optimism about the economy and reignited “animal spirits” – as has President-elect Biden’s plan to nominate the ultra-dovish former Federal Reserve Chairperson Janet Yellen for Treasury Secretary. Interestingly, according to the WSJ, the combination of a Democratic president, Republican Senate, and Democratic House has not occurred since 1886 (we will know if it sticks after the Georgia runoff). Nevertheless, if anyone thinks our government might soon come to its collective senses regarding the short-term benefits but long-term damage of ZIRP, QE, and Modern Monetary Theory, they should think again. The only glitch right now is the impasse in Congress about the details inside the next stimulus package. And there is one more significant boost that investors expect from Biden, and that is a reduction in the tariffs and trade conflict with China that wreaked so much havoc on investor sentiment towards small caps, value, and cyclicals. I talk more about that below.

Going forward, absent another exogenous shock, I think the reopening trade is sustainable and the historic imbalances in Value/Growth and Small/Large performance ratios will continue to gradually revert and market leadership broadens, which is good for the long-term health of the market. The reined-in economy with its pent-up demand is ready to bust the gates, bolstered by virtually unlimited global liquidity and massive pro-cyclical fiscal and monetary stimulus here at home (with no end in sight), as well as low interest rates (aided by the Fed’s de facto yield curve control), low tax rates, rising inflation (but likely below central bank targets), and the innovation, disruption, and productivity gains of rapidly advancing technologies. And although the major cap-weighted indexes (led by mega-cap Tech names) have already largely priced this in, there is reason to believe that earnings estimates are on the low side for 2021 and stocks have more room to run to the upside. Moreover, I expect active selection, strategic beta ETFs, and equal weighting will outperform.

On that note, Sabrient has been pitching to some prominent ETF issuers a variety of rules-based, strategic-beta indexes based on various combinations of our seven core quantitative models, along with compelling backtest simulations. If you would like more information, please feel free to send me an email.

As a reminder, we enhanced our growth-at-a-reasonable-price (aka GARP) quantitative model just about 12 months ago (starting with the December 2019 Baker’s Dozen), and so our newer Baker’s Dozen portfolios reflect better balance between secular and cyclical growth and across large/mid/small market caps, with markedly improved performance relative to the benchmark S&P 500, even with this year’s continued market bifurcation between Growth/Value factors and Large/Small caps. But at the same time, they are also positioned for increased market breadth as well as an ongoing rotation to value, cyclicals, and small caps. So, in my humble opinion, this provides solid justification for an investor to take a fresh look at Sabrient’s portfolios today.

In this periodic update, I provide a comprehensive market commentary, offer my technical analysis of the S&P 500 chart, review Sabrient’s latest fundamentals-based SectorCast quant rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. To summarize, our outlook is bullish (although not without bouts of volatility), the sector rankings reflect a moderately bullish bias (as the corporate outlook is gaining visibility), the technical picture looks solid, and our sector rotation model is in a bullish posture. In other words, we believe “the stars are aligned” for additional upside in the US stock market – as well as in emerging markets and alternatives (including hard assets, gold, and cryptocurrencies).

As a reminder, you can go to http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials to find my latest Baker’s Dozen presentation slide deck and commentary on terminating portfolios. Read on….