IN Tune Podcast: 2021 Mid-Year Update
- midyear update
As equity markets head into the second half of 2021, the following podcast provides an update on our forecasts for both the US and Canadian stock markets, with particular attention on the secular bull market in the US, Canada’s consistent performance, and the transition to more fundamentally driven portfolio management.
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You’re listening to IN Tune, a podcast series featuring equity research analysts from BMO Capital Markets. Our shows explore key emerging themes, trends, and issues which are important to our institutional clients globally.
Hello, this is Brian Belski chief investment strategist at BMO Capital Markets. Now that the calendar’s flipped officially into the second half of 2021, we thought it would be apropos to dust off our forecasts for the remainder of the year and let our clients get a feel for the what, how, and why our forecasts have changed since we originally put them out, and what we see happening and unfolding for the rest of 2021. There remains three major points to our overall call on US and Canadian stocks.
Number one, we continue to believe that the US stock market is in the midst of a 20-year bull market, something that we've been in print on and publicly been saying since 2009. In fact, we believe that the second half of that bull market officially started on March 23 of last year, when many of you have heard me say this before; that's when the Ctrl-Alt-Delete happened, the literal reset of the bull market in US stocks when the market hit its low on that date. And in fact, we published a research report on that day publicly stating that that was the low and that there was a very good chance that US stocks would rally 50% from those lows, and that the 20-year bull market was very much alive.
Point number two is we continue to believe Canada's coming along for the ride. Our viewpoint on Canada has remained steadfast for almost a decade, now. As America goes, so goes Canada. In fact, we believe Canadian stocks could do very well the second half of the year, potentially outpacing the US in terms of total return and performance.
Lastly, the stock market is a market of stocks. We continue to believe that most investors are way too macro-oriented, and case in point, way too worried about inflation this year, worried about market peaks in earnings, and what comes next with respect to interest rates or the macro and quantitative backdrop of the market. That's why we continue to focus our research on both the United States and Canadian stock markets on bottoms up stock picking, active stock management in terms of portfolios, and thematic research and portfolio analysis in terms of how we are suggesting our sector inputs in our opinions, especially relative to the what we view the rest of the market is doing in too focused on macro and too focused on quant.
So what does that say for our forecast with respect to the US stock market? Well, as many of you know, we came out and published our 2021 market outlook in November of 2020. With a 4200 target in terms of price, and $175 in terms of earnings. In May we upped those numbers, revised them to 4500 in price and $190 in terms of earnings, given the pace of the recovery was a little bit faster than even we thought number one and number two, the fundamental wherewithal of US stocks were strong and we anticipate to become even stronger. Although some investors are suggesting, quite frankly, that this is as good as it gets for US stocks, we firmly believe there is still more room to run in the months ahead with our S&P 500 year-end price target implying still very positive single-digit returns from here. But still, given the fact that we have seen a double-digit return already in 2021, that is a very strong move in markets. For that part, if you take a look at how the bull market works in the second year of a bull market, it's been 15 months since the S&P 500, 16 months I'm sorry, since the S&P 500 low in March of last year. And in year two of bull markets, if this is the reset, meaning the second year of the second half of the bull market, if you
follow that, our work shows the US stocks register a 12.6% average return during the year two a bull markets going back to 1945. Much smaller obviously than the 40% average gains seen in year one. That being said, the year two price return jumps to 17.1% when looking at bull markets that were preceded by bear market declines of 30% or more, like the one we experienced in 2020.
It's just kind of a fancy way of saying year two is setting up to be exactly the way we thought, kind of mid-double-digit returns; obviously the first half of the year is very strong. And we think single-digit returns from here, as we kind of transition into more of a fundamentally led market; and the transition to normal is making progress. Momentum is clearly still the name of the game in terms of these moves that we've seen with respect to value and growth in some of the sectors. But as we transition more and more into an earnings driven market, we have
proven through our work that earnings driven markets, while they're more consistent and stable, P/E driven markets are obviously stronger and obviously higher in terms of momentum. And that's okay. It's okay to be seeing a transitioning and maturing bull market. And I think that's where a lot of investors are having a hard time because of this flip flopping that we've seen in the markets in 2021. Especially, are we a growth market? Are we a value market? What sectors should we be in? And so that's why we've really tried to maintain more of an everything-in-moderation type tone with respect to our sectors and in where we're positioned accordingly. We continue to maintain an equal weight across the board in terms of small, mid, and large cap stocks and growth versus value stocks.
Clearly, the markets in the United States have exhibited a very strong move in value, and recently since the calendar turned into the second half, much of May and June and into July, have really been dominated by growth features. We do not believe growth is scarce. When growth is scarce growth outperforms, which has been a theme through the mid-part of this new decade since 2010, and really into the new decade of 2020. But growth is not scarce. If we're still going to see double-digit earnings growth for the market at near record low interest rates, that is an exceedingly positive backdrop for stocks. So we think that the tilt should be a higher quality, more sustainable, more consistent fundamental attributes within companies. And that actually benefits both value and growth. And as we said previously, helps to be more moderate in equal weighting small, mid, and large cap stocks equivalently.
From a sector perspective, we remain overweight financials, consumer discretionary, industrials, and materials. And the only change that we made since our original 2021 forecast is we did upgrade energy from underweight to market weight, we've had to do a bit of a mad call there because that was a momentum driven market. And given that it's only 3% of the market, we decided to be a little bit more constructive on it. We do believe the majority of the upside gains have already been attained in the energy sector and we prefer energy in Canada relative to the US, but that being said, we neutralized our position in energy, and also went to an underweight in consumer staples, given what we've seen in valuation there. It's really the only changes that we made. We remain steadfast on a tactical basis, and the way that we look at tactical is the next six to 12 months to be overweight those sectors.
We continue to believe financials, of the four, are our favorite from an institutional perspective. Again, we believe that the majority of our institutional clients have been underexposed financials for a long time, and they've certainly enjoyed the value part of the trade, that being financials, and the dividend growth side of things in terms of financials, but we continue to believe that financials and especially the theme of scale in financials, with respect to the money center banks, asset managers, and brokers, are going to continue to be the major fundamental play in financials. That's oh, by the way, is why we like Canadian banks, especially names like BMO, RBC, and TD that have very strong crossborder relationships with obviously the United States, and have multi asset divisions akin to the money center banks in the United States. And we believe the US is going to continue to lead the recovery going forward, again, with Canada being a close second.
Now Canada also has had a wonderful first half of the year with posting double-digit returns, and in fact, outpaced the US for much of the first half. And akin to the US in May, we increased our targets for both price and earnings from 19,000 to 20,500 in price and from $1100 in earnings to $1180 in earnings. Akin to the US, we are overweight financials, consumer discretionary, industrials, and materials. As we previously spoke on this podcast, we do prefer energy in Canada versus the US, we're neutral energy in Canada. But given the strong management background in terms of focusing on corporate actions, meaning buybacks and cash flow (cash flow is a very key thing in the energy sector) and we prefer energy in Canada. That's why we have maintained large positions in the portfolios that we manage, real live money portfolios that we manage in Canada with respect to names like Enbridge, Trans Canada, and Suncor.
Again, we believe that equities are going to be the consistent play going forward, and we think thematic bottoms-up portfolio management will continue to dominate. And why we say that is again, as I said in the beginning of the podcast, continue to believe there's too much focus on inflation, and macro variables. And I think what we've seen the last 10 or 15 years in the marketplace, those signals in terms of macro, have been too focused upon, with a lot of investors kind of looking at the same thing. We continue to believe that we're entering into a classic stock pickers market, which favors fundamentals, which favors active stock picking, which is going to favor what we believe is the best asset in the world. And we believe that's North American stocks, both in Canada and the United States.
Lastly, in terms of portfolios, we have the very good fortune of running portfolios for both the US and Canada for our high net worth clients’ real live money portfolios. And what we've seen in our portfolios, seven out of our nine products have outperformed the market so far this year. One of the products that has not outperformed is something that we call the “Anything but the Big Three Portfolio.” It's because it's in Canada, and we can’t own anything in financials, materials and energy, the big three sectors. And this has been a portfolio has been excessively strong, especially given the volatility that we've seen in energy stocks, and financials for that matter, for the last 24 months. But given the fact that those three sectors are all kind of running on all cylinders, it's fallen back from the markets; still up double digits, by the way, year to date, but lagging the market a little bit. But I think that's where the opportunity is in Canada, in the consumer space in the technology space in Canada, sectors that continue to be very strong. And we think from a stock picking perspective. So going back on our comment with respect to themes and stock picking, the stock market is a market of stocks. And I think the more big picture you focus, the
more that's going to take your focus away from what's happened on a bottoms-up level: companies are companies, and fundamentals do matter.
So we continue to be bullish from a longer-term perspective and hope that our work is helping you. If you'd like to see our work, please reach out to your relationship manager or reach out to us directly. Thank you so much for listening and for all of your support. We hope our work is helping you. This is Brian Belski chief investment strategist at BMO Capital Markets and thank you so much for joining us.
Thanks for listening to IN Tune, presented by BMO Capital Markets Equity Research. You can subscribe to IN Tune on Apple Podcasts, Spotify, Google Podcasts, and other podcast providers. Or, visit our website at researchglobal0.bmocapitalmarkets.com to listen to more podcasts. Until next time, thank you for tuning in.
To access our full disclosures, please visit researchglobal0.bmocapitalmarkets.com/public-disclosure.
Chief Investment Strategist
Brian is the Chief Investment Strategist and leader of the Investment Strategy Group, provides strategic investment and portfolio management advice to both instit...(..)View Full Profile >
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