In this week’s blog, Andrew Cowen, CCM’s head of equities, shares his thoughts on the markets in early 2021 and his outlook for the upcoming months.
This year launched with several macroenvironment changes portending a very different first quarter of 2021 than for most of 2020. Earnings season for the S&P 500 is about 75% complete, with an average earnings growth of about 6.4% thus far. Small caps have dramatically outperformed over large caps so far this year, a continuation of the fourth quarter’s trend. Economic recovery plays also continue to dominate the market such as financials, industrials, and commodity-linked companies.
Interest rate increases and spikes in almost every commodity including agricultural, metals, and energy, are already flowing throughout the economy. This new landscape tends to be a good sign for financial firms as they historically perform significantly better in a recovering economy with higher rates and steeper yield curves. Yet, profit margins tend to decrease for industrial and other companies as the forces of better revenues counterbalance significantly higher input costs.
Growth companies, which are already facing difficult compares with demand pull forwards from last year, could see valuation compression as revenue growth is less unusual and future year’s earnings are discounted back at a higher rate. It will be telling to see if certain companies that specifically cater to the quarantine economy can live up to performance expectations embedded in elevated valuations in a normal economy.
We continue to believe there is an enormous valuation disconnect between many yielding securities and the performance of their underlying assets. We also believe that while many companies possess secular advantages highlighted over the past twelve months and can continue to gain share in many industries, markets ascribe “disrupter” valuations to others whose long-term prospects are still uncertain. As such we have positioned our equity portfolios with heavier weightings in companies whose valuations have either derated despite coming through COVID-19 unscathed or whose businesses are positioned for an economic recovery.