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Market Rotation, Buying Continue – Plus, Two 2021 Investment Ideas

| November 23, 2020
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For all that’s happened so far in 2020, the market is up. There are several reasons, but here are five of the biggest, in Cornerstone’s opinion:

  1. The S&P 500 includes many large tech companies that we could not have lived without during the pandemic, as well as many other companies considered essential
  2. The Federal Reserve pushed the discount rate down significantly with low interest rates
  3. Government stimulus supported consumer spending
  4. Companies adapted and lowered expenses
  5. Many people began to accept certain levels of risk and behave somewhat normally from a consumer consumption standpoint

This brings us to the most current events, where the market’s most hated enemy – uncertainty – has been alleviated even more with the election finished and two positive vaccine trial results from Pfizer/BioNTech and Moderna (plus, we're still waiting on Johnson & Johnson).

Over the last week all these positive developments started a mini rotation in equities markets, where value stocks, non “stay at home” stocks, and small cap stocks jumped. This is occurring in the most unloved sectors since COVID-19 began – like energy, transportation, and financials.

Using Map Signals’ trusty big money index (BMI), we saw three times more bullish indicators than usual, even though some of that dwindled as the week progressed:

This is important because we're seeing continued rotation and a broadening out in terms of institutional investing. That said, we don't think it's the death of growth stocks by any means. Rather, sellers are trimming gains while buying continues. In fact, there’s been more than twice as much buying as selling over the last week, creating significant buying velocity:

To illustrate the continued appetite for growth equities, the following two charts show “big money” buying and selling in technology. A rising green line means quickly increasing buying, while a rising red line means increasing selling.

The technology selling isn’t that noteworthy from a historical perspective, despite previously unloved sectors gaining more recent favor:

We even saw indications of these rising green lines in healthcare, industrials, materials, and discretionary. The question is, are we seeing the beginning of a full rotation, with previously loved growth stocks falling out of favor?

Our synopsis is that’s not the case as there’s still a significant road to get to a fully distributed COVID-19 vaccine before we’re completely out of the tunnel. In other words, we don't think a sudden end to what has been working from a sector basis is in the cards.

Ask yourself, are you and millions of others suddenly going to stop working remotely or using cloud storage? No.

So, while the stock market provides forward-looking indicators, we must continue to target sectors where we see the best future growth. As such, in 2021, Cornerstone has its eyes on two thematic sector investment ideas before our rebalance on January 1.

Infrastructure

The Committee for a Responsible Federal Budget gives us a good idea on expected infrastructure spending by President-elect Biden:

As you can see, the expectation is for somewhere around $4.45 trillion to be spent on infrastructure and other domestic spending. That huge number is very much the result of a significant backlog in public infrastructure spending:

There is serious Congressional desire for spending on roads, bridges, ports, clean water, trains, transit systems, electric vehicle charging stations, schools, hospitals, and much more. An even more bullish data point for this investment thesis is that the American people have wanted Washington to act on this for more than a decade.

We believe this is one of the few bipartisan deals that could happen within the first 100 days of a Biden presidency, leaving ample time for legislators to continue arguing about the things they disagree on.

The expectation is this would be a 10-year plan to upgrade existing infrastructure and add new layers of advanced infrastructure. The plan will also be designed as a massive job creation effort by both political parties. In our opinion, the results of this investment thesis could be similar to the digital transformation that has led investment gains in 2020.

Cybersecurity

The second thematic 2021 investment idea we’re exploring is cybersecurity, which has been in the spotlight recently because of our elections. Escalating political tensions have renewed concerns about cyberattacks from foreign nations, adding on to the ever-present risk of traditional hackers.

 

Many organizations are already making significant cybersecurity investments – spending in 2019 topped $124 billion, according to research firm Gartner. Yet, we believe there are several important catalysts that remain drivers of growth for this thematic sector.

One is cybercrime. Last year, there were nearly 1,500 publicly reported data breaches and 165 million records exposed in the U.S. alone:

This has led to an estimate that the cost of cybercrime could rise to $6 trillion annually by 2021, up from $3 trillion annually in 2015, according to cyber economy research firm Cyber Security Ventures. Global connectivity trends are likely to continue enticing hackers to exploit weaknesses in cybersecurity defenses, especially as the Internet of Things may grow an additional 21 percent this year alone.

The second catalyst is the changing regulatory environment. In response to many high-profile data breaches, governments and regulators around the world are implementing new laws concerning data privacy and cybersecurity.

The most important and far reaching is the European Union’s General Data Protection Regulation, which has unified privacy laws across EU countries. Brazil, Japan, and Thailand have also passed similar laws in recent years.

Likewise, 31 U.S. states enacted cybersecurity-related legislation in 2019 and six separate cybersecurity bills were passed by either the U.S. House of Representatives or Senate last year. We believe support will continue to grow for comprehensive federal cybersecurity legislation.

A final catalyst for this investment thesis is the way organizations spend on cybersecurity due to the above-mentioned threat of cyberattacks and new data privacy laws. Not only has spending jumped, but it’s become increasingly “sticky” (i.e., these costs are not going away).

See, organizations around the world (even schools) have little choice but to increase their cybersecurity defenses. Estimates show worldwide cybersecurity spending could more than double from 2019 to 2024, topping $300 billion annually, according to Global Market Insights. And since cybersecurity is increasingly becoming a need for organizations, not a want, we believe future spending in this area will be less susceptible to cyclical slowdowns.

Securities sold through CoreCap Investments, LLC.  Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial Services, CoreCap Investments, and CoreCap Advisors are separate and unaffiliated entities.

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