Weekly Warm Up: Party Like It's 2020, Not 1999
While comparisons to 1999 abound, we look at the similarities and the differences. Bottom line, we don't expect a narrow blow-off move this time. Instead, we expect a new economic cycle will lead to broader participation in the bull market once this ongoing correction is over.
In the past few weeks we have heard more comparisons to 1999. The similarities
are numerous, but so are the differences. We do not think the US equity market
is about to enter a narrow 1999 type blow-off move led by the Nasdaq. Instead,
we believe the correction that began in early June is likely not over and has
potential downside to 2800-2850 on the S&P 500. Once the correction is over,
we expect a broadening of performance and leadership, with most sectors and
stocks doing well in this new bull market.
The past month has been very difficult for many of the early cycle/recovery
stocks. We think this underperformance represents a consolidation of the first
leg higher during which cyclicals trounced defensives by 42%. This is a clear
change of leadership from the late cycle environment of the past few years
during which cyclicals consistently underperformed defensives. The economic
data supports our V-shaped recovery, which means we want to buy this dip in
cyclicals as the market corrects over the next few weeks.
Many tech companies were beneficiaries of the stay-at-home environment, but
much of this benefit was likely a pull forward of demand. Morgan Stanley's
latest CIO Survey published this past week projects IT budgets to decline (4.4%)
in 2020, a record decline and worse than the (3.5%) drop seen in our 1Q09
survey at the trough of the GFC recession. This makes perfect sense to us given
the inherent cyclicality of technology capital spending. It also presents a risk and
opportunity for investors who can discern between the true secular growers that
are experiencing a sustainable acceleration in existing trends versus those that
got a one-time boost from the lockdown.
Earnings growth is expected to trough in the second quarter at -45% y/y.
Substantial dispersion between sectors/industry groups exists, with defensive
areas expected to experience relatively better growth while cyclical areas are
expected to see a severe decline in earnings. Coming out of a recession, we think
it pays to buy those stocks with the lowest expectations—i.e., cyclicals, and to be
careful with defensive stocks that have relatively high earnings growth
expectations.