As the Worm Turns

As the Worm Turns 2

By David Nelson, CFA CMT

The worm has turned is an idiom often associated with the change of fortune of a person. I’m going to take the liberty and focus it right where it matters most your pocketbook.

In the context of the last 10 years what we’ve seen in the last couple of months represents a sea change for investors. For most of the last decade, passive or index investing has been difficult to beat and frustrating for professional and retail investors alike. With each passing year the biggest companies dominated by technology and communication giants grew ever larger. The top 5 companies by market cap ($7.5 Trillion) are bigger than the entire economic output of Japan and Germany combined.

The Floating Benchmark

Sure, many companies outpaced the so-called FAANG stocks but your odds of beating the S&P 500 were diminished with each passing year. Having been in the financial services industry for more than 25 years I’ve found that most investors judge their portfolio against a floating benchmark. In a bull market it’s the S&P 500 or Amazon (AMZN) whichever is up more and in a bear market CDs.

Without question Pfizer’s (PFE) announcement of a vaccine meeting the end point of its trial has launched a pro-cyclical market rotation forcing the market’s decade long leadership to the back of the bus.

Sector Performance since November 9th Pfizer vaccine announcement

Year to date on the heels of a rough first day the new leadership picked up right where it left off. Since the November 9th announcement, Tech has come in a distant 6th trailing the broad index.

Markets of course have all but priced in a successful vaccine rollout and eventual herd immunity. The failure of federal, state and local government to coordinate has forced a significant shortfall in the numbers of those who have received their first injection. Biden has said his administration expects to deliver 100 million does in the first 100 days and some like Dr. Fauci have suggested that goal is achievable.

While Democrats only have a slim majority in the House and need the VP as a Senate tie breaker the executive and congressional control makes more of their agenda achievable. At a minimum I would expect an aggressive fiscal calendar and massive stimulus. Stocks have been sniffing out increased spending since election day and with several vaccines available it’s not surprising estimates have been rising.   

Estimate Revisions – 2021

In a recent note Goldman’s David Kostin raised his 2021 estimate for the S&P 500 to $178 implying 31% growth for this year. That’s well above the street’s 22% growth but confirms that analysts are becoming increasingly bullish with so much capital looking for a home.

There are parts of the Biden agenda that would force us to cut those estimates including any attempt at eliminating the corporate tax cut. While a tax overhaul is certainly achievable the narrow margin in the house and tie breaker needed in the Senate still make it a challenge. Any tax changes that make it to the President Elect’s desk I believe will not be retroactive and won’t kick in until 2022. 


The unanswered question for markets and in turn investors is how long can inflation stay subdued in the face of so much spending? The increase of economic activity along with a weaker dollar certainly hasn’t been lost on the commodity markets. It’s probably important to look beyond the broad-based commodity charts like the Bloomberg Commodity Index which has a significant weighting in energy products which have their own secular dynamic. Copper is approaching 20-year highs. Lumber has also broken out after going parabolic off the March 2020 bottom.

Despite the above, to date CPI estimates all the way out to 2022 remain subdued and may prove key in the Fed’s ability to hold fast to their current zero rate policy. The rise in commodities hasn’t been lost on the long end of the curve with 10-year rates reaching the highest levels since March last year. The spread between 10 and 2-year yields is the highest since April 2018 and speaks volumes as to the strong performance in Financials since the November 8th announcement.

10-year vs 2-year treasury yields

The new market leadership and momentum will be tested

Given the tragic and chaotic events in Washington the recent momentum and leadership change will be tested several times in the weeks ahead. The market barometer continues to be Large Cap secular growth. This is where investors will go to hide in much the same way they used to hide in safe havens from another era like Proctor & Gamble (PG) or Philip Morris (MO).

Maybe the most important phrase I’ve used in the last year is the following: “Growth is the most expensive when there isn’t any.” Suddenly investors have a range of choices beyond the 5 biggest stocks in the S&P 500.

The question isn’t whether or not the worm has turned but will it turn back?

*At the time of this article some funds managed by David were long AAPL, AMZN, GOOGL & MSFT