Fundstrat’s Tom Lee predicts 2021 should be another strong year for the stock market despite a looming 10 percent correction.
Lee predicts the S&P 500 to end this year at 3,800, and he sees stocks rising to 4,300 in the second half of 2021, according to his outlook sent to clients Thursday. However, he warms of a dip to 3,500 in the first half, CNBC explained.
The S&P 500 finished Wednesday at 3,701. The index is up 14.6% year-to-date. A gain to 4,300 represents a 16% increase from Wednesday’s S&P 500 close, CNBC said.
“I think we have a 10% kind of pullback, and I think that’s a pause that refreshes,” Lee said. “We’re overbought...I think it’s going to be a painful correction, but I think in other similar periods where you’re starting an expansion, the correction is really short - one or two months. I think it’s going to start either February, March or April, sometime in that window and then when you get past the spring, that’s when the market starts to rally. The disease should start pulling back.”
Lee expects the economy to expand as the vaccines become more widespread. “Look at China. China has just boomed. Once people felt it was vanquished, they had a boom. I think that boom is going to happen here,” Lee said.
Lee said his top sectors for 2021 are the cyclicals that will benefit from a recovery: discretionary, industrials and energy.
“I think part of tech that is going to struggle. It is the most crowded trade. The most crowded trade is owning large cap tech, work from home and FANG. That is where the greatest adjustment will take place during that correction,” he said. “I think those would be leading us lower.”
Meanwhile, fund managers who are optimistic about a return to economic growth have been slashing their cash positions and embracing risk assets to an extent that’s raising red flags for strategists at Bank of America Corp.
Money managers overseeing $534 billion in total are underweight cash for the first time since May 2013, with levels down to 4%, according to a BofA survey that took place Dec. 4 through Dec. 10, Bloomberg said.
Investors are the most bullish on stocks and commodities -- the so-called “risk-on” assets -- since February 2011, while the Bitcoin rose in the list of the most crowded trades, according to BofA. The plunge in cash exposure is setting off the broker’s sell signal for equities.
“Investor sentiment is bullish as vaccine hopes induce strong ‘buy the reopening’ trade,” said BofA strategists led by Michael Hartnett in a note. “We say sell the vaccine in the first quarter 2021.”
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