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Why Goldman Sachs sees a very different markets rally ahead for 2021

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Why Goldman Sachs sees a very different markets rally ahead for 2021


Good morning.

It’s another day of choppy trade in stocks, oil, and in Bitcoin. U.S. futures have been up and down all morning as voters head to the polls in Georgia to determine control of the U.S. Senate and what that will ultimately mean for more stimulus spending and for American tax policy and its regulatory climate.

In today’s essay, I look beyond voting day to assess which sectors stand to gain in 2021.

But first… let’s check in on what’s moving the markets.

Markets update

Asia

  • The major Asia indexes are mixed in afternoon trading with the Shanghai Composite up 0.7%.
  • Shares in China Mobile popped nearly 7% on Tuesday after the New York Stock Exchange pulled an about-face, saying it won’t be delisting the firm, or two other China telcos, after all.
  • Qantas Airways is betting international travel will come back by this summer. The Australian carrier has begun taking reservations on July flights to Hong Kong, Singapore and Japan (that’s good news for Tokyo 2021 organizers), and for London flights in October.

Europe

  • The European bourses are choppy in early trading. The Stoxx Europe 600 was down 0.3% at the open amid fears that a new wave of business- and school-closings will stifle an economic comeback for the region.
  • The FTSE was trading higher on Tuesday morning despite a round of tough new lockdown measures going into effect across England.
  • The long awaited merger between Fiat Chrysler and PSA Group to form the world’s fourth largest carmaker cleared a series of crucial shareholder votes on Monday, sending shares in both companies briefly higher. (The new company will be called Impavid Motors… kidding… It’s Stellantis, a moniker derived from the Latin verb stella, or, “to cover with stars.”)

U.S.

  • U.S. futures are slightly to the upside this morning. I know. I said something similar, and then U.S. stocks bombed shortly after the opening bell.
  • The S&P 500 closed 1.48% lower on Monday, after recovering in late trade. At one point, the benchmark index was at risk of pulling off its worst start to the year since 2001.
  • All eyes will be on the Georgia run-off election today. Polls show it’s a dead heat. In an investor note yesterday, Goldman Sachs outlined what’s at stake, saying, “if Democrats manage to win both of the Senate seats in play in Georgia…this would lead to greater fiscal stimulus—we would expect around $600bn more on top of the recently enacted $900bn—but would also likely mean tax increases to finance additional spending.” Any tax rise, they add, would be on the small side.

Elsewhere

  • Gold is flat, trading around $1,945/ounce
  • The dollar is off a touch.
  • Crude is up, with Brent futures trading above $51/barrel as lockdown measures again weigh on the energy market.
  • Bitcoin trade remains volatile. The digital currency, as I type, is now at $30,835, 10% off its Jan. 3 all-time high. That’s despite JP Morgan issuing a bullish call of Bitcoin topping $146,000 in the long-term.

***

Looking back to glimpse the future

To get a better indication of the year ahead, it’s worth taking a second look at what happened last year—specifically, at Q4 of 2020.

On a full-return basis (which factors in dividends), the S&P 500 climbed 18% in 2020, Goldman Sachs calculates, largely on the back of a surge in tech stocks.

But tech stocks have played only a secondary role in the very significant post-Election Day rally. The big drivers of late have been energy (up 28% in Q4), financials (up 23% in that period), and industrials (+16%). Each of those sectors outperformed the S&P as a whole in the final quarter of the year. The Goldman chart below breaks this down further:

Now, nobody is saying the tech trade has run its course. Companies and consumers will continue to invest heavily in tech—both hardware and software—in good times and bad. And, as long as interest rates remain at these near-zero levels and inflation remains a distant prospect, that cycle of investment should continue well into the future.

But growth stocks, which as a category comprises tech, are much pricier than the likes of value stocks such as financials and industrials. And so investors are betting there’s greater return to be had by rotating out of the work-from-home trade and into the recovery trade. That’s certainly been true since November, around the time health officials signaled they’d give the green-light for the first batch of COVID vaccinations.

Looking forward to the year ahead, Goldman predicts the S&P will finish 2021 at 4,300. That’s 16% above yesterday’s close, which, incidentally, would be “twice the 8% average annual return since 1930,” Goldman notes. 

For such a rally to happen, more sectors would need to participate. In other words, look to Q4 2020 for your cues on how we get from 3,700 to 4,300.

***

Have a nice day, everyone. I’ll see you back here tomorrow… But first, there’s more news below.

Bernhard Warner
@BernhardWarner
[email protected]

As always, you can write to [email protected] or reply to this email with suggestions and feedback.



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Business

Elon Musk loves Joe Biden

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A deluge of feedback in a turbulent week


Good morning.  In a lengthy phone interview with Fortune’s Vivienne Walt last week, the world’s richest man (sorry, JB) gushed over the new American president. “I’m super fired up that the new administration is focused on climate,” he said. 

Musk fan boys can tell you that his political views have long leaned to the right, on many issues. He has fought unionization at his factories, and in 2018, donated far more to Republicans than Democrats.

But his turnaround on Biden should come as no surprise. The Biden team is contemplating a variety of measure to encourage electric cars and attack climate change—which can only mean more money in Musk’s pocket. It recognizes a new reality in the climate debate from a decade or two ago. Businesses used to routinely oppose climate discussions because they feared resulting taxes and regulations. But one person’s tax is another’s subsidy. And today, some of the biggest companies—Tesla included (No. 7 in market cap in the S&P 500)—are on the receiving end.

More news below. And here’s your fact for the day: For the first time in 37 years, Budweiser will not be advertising in the Super Bowl. I guess the Clydesdales are in quarantine.

Alan Murray
@alansmurray

[email protected]



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What the savvy investor can learn from the bonkers rally in GameStop shares

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What the savvy investor can learn from the bonkers rally in GameStop shares


This is the web version of the Bull Sheet, Fortune’s no-BS daily newsletter on the markets. Sign up to receive it in your inbox here.

Good morning, Bull Sheeters. Tech stocks are leading the way this morning, sending U.S. futures mostly higher, and lifting global stocks, too.

It’s a big earnings week for Big Tech with one half of the FAANGM sextet reporting in the coming days.

In today’s essay, I look at the bubbly trade in penny and loss-making stocks, including the crazy surge in GameStop.

But first, let’s see where investors are putting their money.

Markets update

Asia

  • The major Asia indexes are mostly higher in afternoon trading with Hong Kong’s Hang Seng up 2.4%, continuing an impressive monthlong rally.
  • The big gainer is Tencent, which at one point was up more than 10% on Monday as bulls poured into call options at a staggering clip.
  • China is the new global leader for business investment. The much watched figures on direct foreign investment came out this weekend, showing the U.S. lost the No. 1 position in the past year, thanks to COVID-19.

Europe

  • The European bourses were mostly higher out of the gates with the Stoxx Europe 600 up 0.5% at the open, before slipping.
  • President Biden phoned a slew of world leaders this weekend, including Britain’s Boris Johnson. Downing Street was quick to highlight that the topic of a trade deal came up on the call. The White House had a different recollection of the conversation.
  • The one-two punch of Brexit and COVID is jangling nerves in the U.K.’s financial and business capital. Roughly 40% of Londoners say they’d consider a move across the Channel to Europe.

U.S.

  • U.S. futures point to a positive open. That’s after all three exchanges closed out last week in the green.
  • Goldman Sachs equity strategists see signs of “froth” and “unsustainable excess” in the U.S. stock market. It’s not just with SPACs, they warn, but also the “bubble-like” enthusiasm for stocks with negative earnings. There’s more on this below in today’s essay.
  • Big tech dominates the earnings calendar this week. The big names include: Microsoft (Tuesday), Apple and Facebook (Wednesday).

Elsewhere

  • Gold is flat, trading around $1,850/ounce.
  • The dollar is down.
  • Crude is up, with Brent trading above $55/barrel.
  • As of 9 a.m. Rome time, Bitcoin was up around 1%, at $33,300.

***

Game on

The B-word comes up a lot on Wall Street these days.

As Goldman Sachs equity analysts wrote in a note this weekend, “among the questions we receive most frequently from clients is whether U.S. stocks trade at unsustainably high levels (read: “Bubble”).”

The answer to that question is: yes, bubbles abound. But you have to know where to look for them.

For example, equities pros struggle to find an adjective for the craze in blank-check SPACs. There have been 56 SPAC IPOs so far in 2021, raising $16 billion. (If SPACs still puzzle you, check out Fortune‘s Jeff John Roberts analysis of what a “lousy” investment the SPAC is for anybody looking to make a quick and decent return.)

There are other alarm bells Goldman sees in the markets—namely, the robust trade in penny stocks, in companies hemorrhaging losses and in overvalued stocks (as represented by EV/sales multiples hitting or exceeding 20X). It almost goes without saying that such risky bets usually don’t end well. And yet volumes in these YOLO (you only live once) trades are reaching historic highs.

EV/sales is a much watched metric. It gives investors a good idea of whether the market value of a company (factoring in its level of equity and debt) is in line with revenues. A stock with a relatively low EV/sales—say, under 1X—may be a company that’s undervalued despite decent top-line growth. A high EV/sales ratio, meanwhile, indicates investor exuberance is running hot for a business whose stock price is growing faster than sales—or so it often seems.

They tend to be highly risky.

“Since 1985,” Goldman writes, “the median stock trading at an EV/sales multiple above 20x has generated a subsequent 12-month return of -1%, compared with +6% for the median US stock.”

In the past month, nearly one-quarter (23%) of shares that have changed hands are companies with out-of-whack inflated EV/sales, as the table above shows. Meanwhile, there’s been a similar surge in the volume of trading in firms with negative earnings.

One such beloved loser is GameStop; it’s soaring again this morning in pre-market trading. The loss-making video game retailer is up nearly six-fold since Jan. 12 as retail investors go all in to punish the many shorts that are betting on its crash. It’s being called the mother of all short squeezes, and it’s triggering a whole slew of vicious take-downs on Twitter. The big scalp for the WallStreetBets crowd is the veteran activist short Andrew Left of Citron Research, who it appears is losing huge sums on his bearish position at the moment.

At one point on Friday, GameStop was the most actively traded U.S.-listed company, Bloomberg reported. Never mind that it had a rough Christmas sales period, and recently delivered a sobering outlook that involves further belt-tightening to weather its COVID-battered market.

GameStop bulls—I can’t believe I just typed those words—are going all in on the stock as if it were an e-commerce juggernaut.

If you were a bubble hunter, stocks like this one would be worth examining.

***

Have a nice day, everyone. I’ll see you here tomorrow… Until then, there’s more news below.

Bernhard Warner
@BernhardWarner
[email protected]

As always, you can write to [email protected] or reply to this email with suggestions and feedback.



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Business

What does big business need to do to earn your trust?

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What does big business need to do to earn your trust?


A peaceful transfer of power doesn’t mean that threats of political violence—and difficult conversations about it—have ended. Tim Ryan, the chair of PwC U.S. weighs in with some advice below. (Hint: The actual challenge leaders are facing is proving that they’re trustworthy.)

But first, here’s your Inaugural poet Amanda Gorman-inspired week in review, in Haiku.

“Where can we find light 
in this never-ending shade?”
Asked by a new voice,

in a new moment,
free from the belly of a 
beast that stalks us all.

It took a poet
to capture the promise of
a hard-won hill, climbed

by many on the 
backs of a justice-seeking
few. Unfinished, yes

we are. But here’s a
good place to start: Pay all the
poets what they’re worth.

Wishing you a lyrically peaceful weekend.

Ellen McGirt
@ellmcgirt
[email protected]



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