Santa Pause?

The S&P 500 took a step back in the second half of the week after making yet another all-time high on Tuesday. Though the market finished just over a percent lower on the week, we have yet to see the widespread selling that often accompanies a broad market pull-back. The ratio of advancing stocks to declining stocks has been well within the normal range. It seems as though participants have been a bit on edge with parts of the market looking heavily overbought in recent weeks, but the index has held its ground through a traditionally weaker stretch of the calendar, and the market historically gets stronger in the last few weeks of the year. 

It is interesting to note that the current market is charting a similar course to the 2009 crash and the 2010 recovery. Using those years as a roadmap, we might expect a more significant pull-back in January. This is obviously not a guarantee, but we have seen significant January shakeups in recent years. Historically the turn of the calendar prompts rotation. We have seen value subtly starting to improve relative to growth over the last few months, and it wouldn't be a shock to us if this continued into the new year with a vaccine on the horizon. With that in mind, we believe weakness over the next few weeks could be used as an opportunity to add value exposure where appropriate.

We believe financials stand out most among the value group. We've added exposure here recently, but there are certainly other candidates out there. An economy getting back on its feet by mid-21 would mean that the banks have significantly overprovisioned for credit losses. Combined with a steeper yield curve, the environment would likely be much improved for the traditional lenders. In addition, many companies are flush with cash, and we could see M&A pick up as they lay the foundations for the post-pandemic world. In that vein, we believe Investment Banks look attractive as well as Investment managers as markets grind higher and participants search for return in a world of low rates.

This is just one example of how we are thinking about industries, but the same logic will need to be applied to all the sectors on the other side of the pandemic. Business is going to look quite different after the virus, and companies will need to be reexamined on their individual merits. This is potentially a significant opportunity for the stock picker.  

Thanks, 

Preston May, CBE®
Research Analyst

This report was prepared by Donaldson Capital Management, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser.

An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios, and investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.

S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.