by Bryan Perry

September 9, 2020

A constant stream of market critics loves to talk down the big rally and how its longevity isn’t justified or rational. They crow about lofty valuations, China tensions, big taxes coming (if the Democrats sweep the elections), social unrest, another surge of Covid, or a combination of some or all of the above reasons.

It goes without saying that this is “the most unloved rally of all time.” The dramatic V-shaped recovery for stocks left scores of investors waiting for the quintessential “retest of the March lows” that seemed “guaranteed” by the majority of the smartest market technicians in the industry – but never happened.

The coronavirus forced politicians into demanding a nationwide shutdown of businesses, throwing the economy into a short-term tailspin that had the bears sharpening their claws. Finally, after an 11-year bull market, the shorts would cash in for billions in profits as the economy nose-dived into a long recession.

That also never happened.

What did happen was the power of the Fed sweeping over Wall Street with the promise of eternal QE (“QE4ever”), accompanied by huge spending bills passed by Congress, and the market never looked back. During the month of June, the market briefly consolidated the torrid gains off the March lows and then rallied unchecked until this past week, when stocks hit pause during the second half of the week.

Businesses quickly learned how to survive and thrive in a pandemic situation. Based on 98% of S&P 500 companies reporting Q2 results, 84% beat earnings estimates (source: FactSet). So much for high-priced stock analysts who are supposed to have privileged information not available to the retail investor!

What is most encouraging, in light of COVID-19 continuing to hamper everyday life for most of the country, is that the economy just added another 1.4 million jobs in August, with the jobless rate diving to 8.4% at a time when economists were looking for a number closer to 10%. That strong jobs number followed reports of stronger-than-expected Factory Orders for July, a rising ISM Manufacturing Index for August, and blowout numbers for new and existing home sales, thanks to historically low interest rates.

These data points set the tone for what is shaping up to be a glorious third quarter, where the GDP could bounce back by as much as 30%, according to the Atlanta Fed’s GDPNow model (charted, below).

GDP Now Forecast Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The U.S. economy is like a coiled spring. Companies have gotten leaner and meaner during the past five months, like they did when the economy emerged from the 2008-2009 Great Recession, when earnings growth exploded higher by 50% on only a 10% recovery in revenue growth. The same could be true this time around with the S&P 500 likely taking out the previous high heading into the Q3 earnings season.

As reported last week, the CDC is asking states to remove obstacles to prepare for widespread distribution of a COVID-19 vaccine by November 1. If a bona-fide vaccine is available November 1, this is a big deal. The U.S. Project “Warp Speed” targeted the availability of a vaccine by early 2021, so one rolling out by November 1 is way ahead of schedule and thus is being met with skepticism of efficacy and safety issues.

Let’s be clear. This is just a headline for now. If this vaccine is available then, it will go to about 20-25 million elderly, front line workers, and people with underlying conditions. Widespread distribution of a vaccine probably won’t be available until the spring of 2021. Regardless, we live in a headline-driven market where key words dominate, so the AI trading platforms and any positive headlines that cross the tape about a readily available vaccine will provide upside fodder for the epicenter and re-opening stocks.

An Income & Growth Strategy for the Next Move Up

In this scenario, there will be a short, fierce rotation into industrial, value, and epicenter stocks that have lagged growth stocks. In fact, this rotation began last week, and it shouldn’t surprise us if big-cap tech stocks spend most of September consolidating their heady gains as re-opening stocks take center stage.

But come early October, when the end-of-quarter window-dressing and third-quarter earnings season kicks off, investors should consider getting fully exposed to the leading growth stocks that dominate 5G, cloud computing, mobile ecommerce, fintech, big data, AI, VR, robotics, augmented reality, EV tech, cybersecurity, work-from-anywhere software, and next-gen chips. These are secular growth sectors.

These sectors are where top- and bottom-line growth are truly organic and not a function of mergers or slashing of expenses. They are also much less at risk of being impacted by interest rates, commodity price volatility, labor shortages, politics, price wars, or another new viral outbreak when flu season returns.

With that in mind, I view the current bout of profit-taking and short-term rotation as an attractive window of opportunity to initiate and add to positions in cutting-edge blue-chip tech stocks.

Relative Three Month Performance Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

For those that are of the view that this market will consolidate up to and through the election cycle, consider selling out of the money covered calls on up days to capture some option premium and create portfolio yield. An active covered call strategy that is properly executed throughout the year can easily generate a 5% to 7% income stream on growth stocks that pay nominal (if any) dividends.

If you need income when Treasuries or agency-backed, municipal, and corporate bonds are no longer a logical or even rational income option, then covered-call income in a healthy stock market makes perfect sense. There are plenty of high-quality vehicles available if you use the proper method. It involves some active management or a solid money manager that knows how to execute a successful option income strategy, but it’s definitely worthwhile if yield (without sacrificing growth) is a priority of one’s portfolio.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Why Lumber and Stocks Dance Together

Sector Spotlight by Jason Bodner
Timing Your Next Buying Points

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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