(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
The investment landscape of 2020 was most certainly unique given the onset of the virus and instant bear market. However, many of the moves by investors this year are classical over-reactions that create opportunities for investors who understand the concept of “mean reversion.” So let that be the central focus of our discussion today.
What a wild week. Not just the elongated process of our election this year. Nor the reaction of investors to each new set of election results. But more interestingly the announcement of strong vaccine trial results from Pfizer Monday that set off a seismic shift in the market.
Out with the old…In with the new.
More specifically the stocks that led the way in 2020 because of their positive connection with the Coronavirus were taken to the cleaners. In particular stocks like Zoom, Peleton, Teledoc. But also all the FAANG stocks that were considered “sure bets” saw some air let out of their balloons.
That money shifted quickly and aggressively to all the “Back to Normal” trades. Meaning those stocks that would benefit the most from the virus being squelched allowing us to get back to more personal contact in areas like travel, leisure and entertainment. This explains why our position in the US Global Jets ETF (JETS) soared 16.1% on Monday.
That was not the only Reitmeister Total Return trade that was standing in the right place. Our Regional Banking ETF (KRE) was specifically selected as one of the groups that would benefit the most from the virus fading into the distance with the economy improving as a result. That positioned deposited a +15% gain in our account yesterday.
So is Steve Reitmeister clairvoyant? And did I foresee this Pfizer announcement coming?
Simply stated I understand the concept of mean reversion that leads some stocks to be WAY overpriced…and thus to stay away from them. And then to go for the beaten down stocks that in time have the best chance to outperform.
This is pretty standard fare for a value oriented investor like myself. I just can’t chase in favor growth stocks as I know they are priced for perfection with a soon to arrive POP!
And the exact timing of that pop is unknown and unknowable in advance. You are truly holding a hot potato that will burn you in time. So I would rather not hold them at all.
Another fun way to think about this is the idea of sports betting. We all know that the Kansas City Chiefs are going to win just about every week. The only question is by how much.
So early on in their rise to power they were 3 point favorites. Or 5 point favorites and are still a good bet. But to liken it to the price of Coronavirus winners like Zoom it would be like betting on the Chiefs as if they were 53 point favorites. Meaning you are unlikely to win the bet and should look elsewhere for better odds.
So the mean reversion here is that society was sooner or later going to get back to normal. That either we adapted to the virus or found a vaccine/cure. And the right side of the investment bet was to avoid the coronavirus winners and instead go for the beaten-down value propositions in airlines, cruise lines, hotels, casinos, restaurants etc. Or the economically sensitive groups that would simply rally along with concept of a rebounding economy like banks, energy, industrials, basic materials etc.
Reity, will this market rotation continue?
Let’s be honest, this is not the first time this rotation has taken place. In fact, it has happened about 3-4 times in recent months when there was other positive news on drug advancements. But this one is closer to the finish line with other trials soon to announce as well. So the odds of discovering an effective and widely available vaccine is improving.
So this market rotation will not be smooth. And there will be days when folks want to buy the dip in their old Coronavirus favorites. But over the next 6-12 months I would expect the aforementioned “Back to Normal” groups to be the serious outperformers. And thus would continue to shift your portfolio in that direction as we have already done in the Reitmeister Total Return portfolio.
Now let’s talk briefly about the election. And don’t forget the pledge we made a long time ago to give me immunity from any comments that offend your political sensibilities. Trust me when I say I have reviewed this section several times to make sure it is as accurate as possible without trying to offend folks in either political camp. So if you do get offended…then its on you…not ol’ Reity 😉
Technically speaking the election is not over until the courts and various states respond to the Trump teams legal actions and we have a final count. Yes, this could be weeks or even months long. But right now the overall market reads the tea leaves as saying it will not be nearly enough to change the outcome of this election. That is why the market has been rallying the past week.
Even still Trump could decide not to concede and just camp out in the White House. Amazingly it is unclear how to remove him from office if he chooses not leave. There really is not hard and fast rules on this subject which is kind of shocking given the age of our nation and how the baton has been passed cleanly 44 times over the years.
So the risks to investors at this time is that if the Trump efforts to reconsider election results, or simply not to concede, gain traction causing the liberal camp of this country to feel like the election is being stolen from them. This is what leads to nationwide protests and could quite easily devolve into civil unrest and riots. And the reason for that is that BOTH sides would believe the other is cheating. (We used to be one nation, but more and more feels like two).
I think the odds of this ugliness unfurling across the country are pretty low, but it is still a possibility we investors need to watch for because it would indeed press pause on the bull rally. And quite possibly spark a pullback or correction depending on the severity.
For now, we will continue to assume that the bull market is on track. Just with a new group of stocks to lead the way.
The reasons for this rally extends beyond the election. And beyond the potential for a Coronavirus vaccine. It comes back to the most traditional reason for a bull market and that is an improving economic environment. Lots of proof of that this week. Here is a quick recap:
ISM Services came in at a strong 56.6. Again anything above 55 is an impressive showing. Even better was the 58.8 print for New Orders that points to solid results in months ahead.
As for employment we got 4 reports on the week that all showed varying degrees of improvement. The weakest of these was the ADP Employment report from Wednesday that only showed 365K jobs added versus the 753K that was expected.
Then on Thursday we got the latest round of Jobless Claims hitting a new post virus low of 751K. This is the 3rd straight week under 800K.
The other Thursday report is Continuing Claims that is getting healthier at an impressive pace. Remember that at one time 25 million Americans were getting unemployment benefits. That is down to 7.285 million at this time. And likely a month from now will be closer to 6 million given the trends in hand.
Lastly on the employment front is the monthly Government Employment Situation report. That report from last Friday was more favorable than ADP’s results at 638K jobs added. The much more impressive stat was the unemployment rate coming down a full 1% from 7.9% to 6.9%. This is better than anyone expected just a few short months ago.
This morning we discovered another solid announcement for the NFIB Small Business Optimism Index coming in at 104 which is about the same level found before the Coronavirus. The more optimistic small business owners are about the future, the more they are likely to spend to grow their business including the hiring of more employees. And that is quite positive for future economic growth.
Added altogether it is hard to deny that the economic data is pointed in the right direction. This truth, coupled with the low interest rate environment, continues to slant things in favor of a bull market.
We just have to be mindful of any changes in the election results and what that could mean for civil unrest. Or for a more serious escalation of the virus that curtails economic activity. Right now these risks are outweighed by the reward which is why we are bullishly biased once again.
What To Do Next?
Right now my Reitmeister Total Return portfolio is correctly positioned to benefit from the “Back to Normal” trade for the market. That’s because we are overweight the groups most likely to benefit from society slowly, but surely emerging from the dark hole of the Coronavirus period.
In all the portfolio has 11 picks ready to excel in the weeks and months ahead including:
8 growth stocks trading at attractive discounts to fair value. Even our 3 tech stocks are uniquely positioned to side step the air being let out of the tech bubble. In fact, two of them just came off monster beat and raise earnings reports that should propel shares much higher in 2021. The rest are in good industries like home building, auto sales, consumer products and clean energy infrastructure.
3 sector ETFs that are perfectly suited to be winners in the back to normal trade. And even with the big gains this past week they still have plenty of room to run as they get back to pre-Coronavirus highs and beyond.
If you would like to see the current portfolio of 11 stocks and ETFs, and be alerted to our next timely trades, then consider starting a 30 day trial by clicking the link below.
Wishing you a world of investment success!
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares were trading at $357.08 per share on Wednesday afternoon, up $3.04 (+0.86%). Year-to-date, SPY has gained 12.53%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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