Scott Martindale  by Scott Martindale
  President & CEO, Sabrient Systems LLC

After a strong Q1, stocks continue to rise on exuberant optimism, and the mega-cap dominated S&P 500 and Nasdaq 100 just hit new highs this week. Notably, the Tech sector significantly lagged the broader market during the second half of Q1, primarily due to worries about the apparent spike in inflation and a surge in the 10-year Treasury yield (as a higher discount rate on future earnings has greater implications for longer duration growth stocks). But once the rapid rise in yield leveled off, Tech caught a bid once again. The Russell 2000 small cap index, after absolutely crushing all others from November through mid-March, has been cooling its jets for the past several weeks. I think the other indexes will need to do the same. In the short term, after going straight up over the past two weeks, the S&P 500 and Nasdaq 100 both look like they need to pause for some technical consolidation, but longer term look pretty darn good for solid upside – so long as earnings reports surprise solidly higher than the already strong predictions, and Q1 earnings season is now at hand.

Regular readers know I have been opining extensively about the bullish convergence of positive events including rapid vaccine rollout, reopening of the economy, massive fiscal and monetary stimulus/support, infrastructure spending, pent-up demand, strong revenue and earnings growth, and the start of a powerful and sustained recovery/expansionary economic phase – but with only a gradual rise in inflation and interest rates – in contrast with those who see the recent surge in inflation metrics and interest rates as the start of a continued escalation and perhaps impending disaster. Notably, in his annual letter to shareholders, JPMorgan CEO Jamie Dimon laid out a similar vision, referring to it as a “Goldilocks moment” leading to an economic boom that “could easily run into 2023.”

In my view, it was normal (and healthy) to see record low interest rates last summer given the economic shutdowns, and as the economy begins to reopen, interest rates are simply returning to pre-pandemic levels. Furthermore, relatively higher yields in the US attract global capital, and the Fed continues to pledge its support – indeed, I think it may even implement yield curve control (YCC) to help keep longer-term rates in check.

And as for inflation, the March CPI reading of 2.6% YOY sounds ominous, but it is mostly due to a low base period, i.e., falling prices at the depth of the pandemic selloff in March 2020, and this dynamic surely will continue over the coming months. Although we see pockets of inflation where there are production bottlenecks (e.g., from shutdowns or disrupted supply chains), it seems that massive stimulus has created asset inflation but little impact on aggregate demand and consumer prices, as personal savings rates remain high and the recent stimulus programs have mainly gone to paying bills, putting people back to work, and building up personal investment accounts. Future spending bills targeting infrastructure or green energy might have a greater impact, but for now, the huge supply of money in circulation is largely offset by disinflationary drivers like low velocity of money, aging demographics, re-globalization of trade and supply chains, and technological disruption. The Treasury market seems to be acknowledging this, as the rapid rise in the 10-year yield has leveled off at around 1.7%.

Thus, I believe that growth stocks, and in particular the Technology sector, must remain a part of every portfolio, even in this nascent expansionary economic phase that should be highly favorable to value and cyclical sectors like Industrial, Financial, Materials, and Energy. Put simply, new technologies from these Tech companies can facilitate other companies from all sectors to be more efficient, productive, and competitive. However, investors must be selective with those secular growth favorites that sport high P/E multiples as they likely will need to “grow into” their current valuations through old-fashioned earnings growth rather than through further multiple expansion, which may limit their upside.

And with Sabrient’s enhanced selection process, we believe our portfolios – including the Q1 2021 Baker’s Dozen that launched on 1/20/21, Small Cap Growth portfolio that launched on 3/15/21, Sabrient Dividend portfolio that launched on 3/19/21, and the upcoming Q2 2021 Baker’s Dozen that launches next week on 4/20/21 – are positioned for any growth scenario.

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 (but with occasional bouts of volatility), our sector rankings reflect a solidly bullish bias, the technical picture is still long-term bullish (although in need of some near-term consolidation), and our sector rotation model retains its bullish posture.  Read on….

Scott Martindale  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....