by Scott Martindale
  President & CEO, Sabrient Systems LLC

Quick assessment:  We have an historic pandemic wreaking havoc upon the global economy, with many US states reversing their reopenings. We just got the worst ever quarterly GDP growth number, and jobless claims are resurging. The Federal Reserve is frantically printing money at breakneck pace to keep our government solvent, with M3 money supply growth having gone parabolic. We have a highly contentious presidential election that many consider to be the most consequential of our lifetimes. There is unyielding and unappeasable social unrest, with nightly rioting in the streets in many of our major cities. Tensions with China are again on the rise, with a new Cold War seemingly at hand. Hurricanes are threatening severe damage in states that are already reeling from a surge in COVID hospitalizations. And yet the Nasdaq 100 (QQQ) has burst out to new highs while the S&P 500 (SPY) is within 3% of its all-time high (although, quite notably, both of these cap-weighted indexes are dominated by a handful of mega-cap, disruptive juggernauts).

Of course, stocks have been bolstered by unprecedented congressional fiscal programs and Fed monetary support, including zero interest rate policy (ZIRP), open-ended quantitative easing (QE), de facto yield curve control (YCC), and the buying of corporate bonds (including junk bonds and fixed-income ETFs – and perhaps will include equity ETFs at some point). This de facto “Fed put” has induced a speculative fervor, FOMO (“fear of missing out”), and a TINA (“There is No Alternative!”) mindset for risk assets – particularly given infinitesimal bond yields and a falling dollar. Furthermore, while COVID cases have risen with the economy’s attempt at reopening, the death rate is down 75% since its peak in April, as the people being infected this time around are generally younger and less vulnerable and hospitals are better prepared.

However, we have witnessed extreme bifurcation in this market, with certain secular growth segments performing extremely well and hitting new all-time highs, while other segments are quite literally in a depression. And although the pandemic has exacerbated this situation, it has been developing for a while. As I have often discussed, when the trade war with China escalated in mid-2018, the market became highly bifurcated to seek the perceived safety of the dominant mega caps over smaller caps, growth over value, and secular growth Technology over the neglected cyclical growth sectors like Financials, Industrials, Materials, and Energy. It rotated defensive and risk-off even given the positive economic outlook. This is also when the price of gold began to ascend. Yes, gold has become much more than just a hedge; it now has its own secular growth story (as discussed below), which is why Sabrient’s new Baker’s Dozen for Q3 2020 includes a gold miner.

So, while Sabrient’s flagship Baker’s Dozen portfolios over the past two years have been dominated by smaller caps, the value factor, and cyclical sectors – to their detriment in this highly bifurcated market – you can see that our newer portfolios since the enhancements were implemented have been much more balanced among large, mid, and small caps, with a slight growth bias over value, and a balance between secular growth and cyclical growth companies.

In this periodic update, I provide a market commentary, offer my technical analysis of the S&P 500, and review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, while our sector rankings look neutral (as you might expect given the poor visibility for earnings), the technical picture is bullish, and our sector rotation model remains bullish.

As a reminder, Sabrient has introduced process enhancements to our forward-looking and valuation-oriented stock selection strategy to improve all-weather performance and reduce relative volatility versus the benchmark S&P 500, as well as to put secular-growth companies (which often display higher valuations) on more equal footing with cyclical-growth companies (which tend to display lower valuations). You can find my latest Baker’s Dozen slide deck and commentary on terminating portfolios at http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials. To read on, click here....

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Stocks continued their bullish charge from the pandemic selloff low on 3/23/20 into early-June, finally stumbling over the past several days due to a combination of overbought technicals, a jump in COVID cases as the economy tries to reopen, and the Fed giving grim commentary on the pace of recovery. But then of course Fed chair Jerome Powell (aka Superman) swooped in this week to save the day, this time to shore up credit markets with additional liquidity by expanding bond purchases into individual corporate bonds rather than just through bond ETFs. But despite unprecedented monetary and fiscal policies, there are many prominent commentators who consider this record-setting recovery rally to be an unwarranted and unsustainable “blow-off top” to a liquidity-driven speculative bubble that is destined for another harsh selloff. They think stocks are pricing in a better economy in the near-term than we enjoyed before the pandemic hit, when instead normalization is likely years away.

Certainly, the daily news and current fundamentals suggest that investors should stay defensive. But stocks always price a future vision 6-12 months in advance, and investors are betting on better times ahead. Momentum, technicals, fear of missing out (FOMO), and timely actions from our Federal Reserve have engendered a broad-based bullish foundation to this market that appears much healthier than anything displayed over the past five years, which was marked by cautious sentiment due to populist upheaval, political polarization, Brexit, trade wars, an attempt to “normalize” interest rates following several years of zero interest-rate policy (ZIRP), and the narrow leadership of the five famed mega-cap “FAAAM” Tech stocks – namely Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOG), and Facebook (FB).

Equal-weight indexes solidly outperformed the cap-weighted versions during the recovery rally from the selloff low on 3/23/20 through the peak on 6/8/20. For example, while the S&P 500 cap-weighted index returned an impressive +45%, the equal weight version returned +58%. Likewise, expanded market breadth is good for Sabrient, as our Baker’s Dozen portfolios ranged from +62% to +83% (and an average of +74%) during that same timeframe, led by the neglected small-mid caps and cyclical sectors. Our Forward Looking Value, Small Cap Growth, and Dividend portfolios also substantially outperformed – and all of them employ versions of our growth at a reasonable price (GARP) selection approach.

Although the past week since 6/8/20 has seen a pullback and technical consolidation, there remains a strong bid under this market, which some attribute to a surge in speculative fervor among retail investors. There is also persistently elevated volatility, as the CBOE Volatility Index (VIX) has remained solidly above the 20 fear threshold since 2/24/20, and in fact has spent most of its time in the 30s and 40s (or higher) even during the exuberant recovery rally. And until earnings normalize, the market is likely to remain both speculative and volatile.

Regardless, so long as there is strong market breadth and not sole dependence on the FAAAM stocks (as we witnessed for much of the past five years), the rally can continue. There are just too many forces supporting capital flow into equities for the bears to overcome. I have been predicting that the elevated forward P/E on the S&P 500 might be in store for further expansion (to perhaps 23-25x) before earnings begin to catch up, as investors position for a post-lockdown recovery. Indeed, the forward P/E hit 22.5x on 6/8/20. But I’d like to offer an addendum to this to say that the forward P/E may stay above 20x even when earnings normalize, so long as the economy stays in growth mode – as I expect it will for the next few years or longer as we embark upon a new post-recession expansionary phase. In fact, I believe that rising valuation multiples today, and the notion that the market actually has become undervalued, are a direct result of: 1) massive global liquidity, 2) ultra-low interest rates, and 3) the ever-growing dominance of secular-growth Technology on both our work processes and the broad-market indexes – all conspiring to create a TINA (“There is No Alternative”) climate for US equities.

In this periodic update, I provide a market commentary, offer my technical analysis of the S&P 500, and review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, while our sector rankings look neutral (as you might expect given the poor visibility for earnings), the technical picture is bullish, and our sector rotation model moved to a bullish posture in late May.

As a reminder, Sabrient has enhanced its forward-looking and valuation-oriented stock selection strategy to improve all-weather performance and reduce relative volatility versus the benchmark S&P 500, as well as to put secular-growth companies (which often display higher valuations) on more equal footing with cyclical-growth firms (which tend to display lower valuations). You can find my latest Baker’s Dozen slide deck and commentary on terminating portfolios at http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials.  Read on....