In a note to clients on Monday evening, Goldman’s chief equity strategist David Kostin stated that his year-end Dow Jones price target for 2021 remains 4,700, which is 9.3 percent higher than where the index closed on Monday.
“Our year-end 2021 target of 4700 implies a 9% gain from current levels and ranks in the 83rd percentile of 4Q returns since 1928,” Kostin wrote in the note.
Kostin is one of Wall Street’s most bullish strategists. Brian Belski of BMO has set the highest target at 4,800. Price targets of 4,000 have been set by strategists from several major firms, including Morgan Stanley’s Mike Wilson.
In August, Kostin raised his target to 4,700.
The Dow Jones
For the first time this year, the Dow Jones closed more than 5% below its all-time high on Thursday, and September was the index’s worst month since March 2020. Equities continued to struggle on Monday, with the Dow Jones dropping 1.3 percent.
Kostin pointed out that the average time between 5% pullbacks was 95 days, which was roughly half the length of the recently broken streak.
Rising Treasury yields appear to have taken a bite out of growth stocks, and tech stocks have been one of the primary culprits of the recent pullback. The S&P 500 is market-cap weighted, which means that even small movements in stocks like Apple and Amazon can cause the headline index level to move.
asset manager intends to launch the DoubleLine Opportunistic Bond ETF and the DoubleLine Shiller CAPE U.S. Equities ETF. Both ETFs will be managed actively. The filing did not include any information about tickers or expense ratios.
The funds would be DoubleLine’s first foray into the burgeoning ETF market. Historically, the fixed-income behemoth has focused on mutual funds and has only collaborated with State Street Global Advisors to sub-advise SPDR DoubleLine Total Return Tactical ETF (TOTL) and a few others.
According to the Investment Company Institute, the combined assets in the US ETF market totaled $6.7 trillion in August, as cost-conscious investors continue to favor the fund that also offers attractive tax efficiency and liquidity.
While the majority of the market’s ETFs are passive, meaning they track their underlying indexes, the DoubleLine’s offerings would be actively managed. According to the filing, the funds will be “semi-transparent,” providing a verified intraday indicative value rather than daily disclosure of their portfolio holdings.
“Demand for actively managed fixed income ETFs has been increasing in 2021, with peers such as Fidelity, JPMorgan, and PIMCO benefiting,” Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA“ said. As investors gain confidence in using fixed income ETFs, they seek to tap into the security selection skills of active managers in order to better manage risk and seek income in a low-rate environment.”
The Opportunistic Bond ETF will hold a diverse portfolio of fixed-income securities, including government bonds, collateralized debt obligations, corporate obligations, and mortgage-backed securities. According to the filing, the fund may invest up to 50% of its net assets in junk bonds and 5% in defaulted corporate securities.
“The bond ETF that they filed for will bear more credit risk than TOTL in order to generate higher income, but it will be managed using the same top-down framework,” Rosenbluth explained. TOTL is expected to fall by about 2.2 percent in 2021.
ETF for Shiller CAPE U.S. Equities
According to the filing, the equity ETF will reference the Shiller Barclays CAPE US Sector TR USD Index, which incorporates the long-term investing principles distilled by Dr. Robert Shiller through the CAPE ratio, or Cyclically Adjusted Price Earnings ratio.
According to the filing, the CAPE ratio evaluates equity market valuations by averaging ten years of inflation adjusted earnings to account for earnings and market cycles.
“The CAPE Shiller filing is also compelling because they offer a primarily index-based mutual fund that is likely to be the fund’s basis, focusing on what equity sectors are most appealing using options and augmenting this with their fixed income expertise to generate some additional income,” Rosenbluth said. “The mutual fund has been a strong performer, quickly accumulating assets.”
The mutual fund with a similar strategy, DoubleLine Shiller Enhanced CAPE fund (DSENX), has $9.6 billion in assets under management and is up more than 15% this year. According to Morningstar, DSENX produced a near 17 percent annualized total return over a five-year period.
The Dow Jones rebound
More than half of Dow Jones stocks are down 10% or more, and half of Nasdaq stocks are down 20% or more. For the past five months, the “average stock” has done nothing. Sentiment has shifted cautiously, with indexes flirting with oversold territory. All of them are net positives, if not conclusive.
As the next possible downside checkpoint, we’re eyeing the July low near 4,250 (also near the May high). The overnight futures low was near 4,270, so that may suffice for the time being. Nothing says it has to happen, but this is the game. The 200-day moving average is around 4,137, which is not far above the “down 10% ” correction line.
So far, today’s action has been twitchy. Opening pop was sold by bullish bears, followed by a recovery, possibly due to the first-of-quarter inflows effect at work. As of now, the Dow Jones is only trading back to where it was 10 minutes before the close yesterday, and it is still looking up at the 4,380 level, where it had topped daily the previous few days.
It’s good to have those streaks completed – we finally got a 5% pullback, and the monthly win streak comes to an end at seven. We can put an end to our discussion of them. History shows that nothing particularly bad usually follows the end of such streaks, though we are still in a risky season with a very staticky set of competing narratives in investors’ ears.
Despite the fact that credit markets have not raised any red flags, the sharp third-quarter slowdown has repriced many stocks. It still appears to be a messy/fitful rotation, with cyclicals regaining traction after 3 to 4 months of lagging, with an emphasis on the messy for the time being.
Merck antiviral news is a nice psychological boost that could help investors look past slipping third-quarter earnings forecasts, supply-chain frictions, policy fog to focus on declining Covid case rates, resilient consumer incomes, and the potential for economic reacceleration in the coming quarters.
As I keep saying, it’s unusual for a market’s year-end peak to occur as early as September or earlier. Fourth-quarter strength is typically concentrated after mid-October and is often based on September-October anxiety.
When was the last time the market peaked for the year before mid-September? In 2015 and 2018, a global slowdown was accompanied by a perception of the Fed being too tight/unresponsive to market signals. We’re not there yet.
Today’s PCE inflation figure helps to explain why Fed officials want to get the taper started and completed as soon as possible, just to have some flexibility to act on inflation. However, market-based inflation expectations are not flying.
Supply-chain issues Perhaps reaching a saturation point, indicating a peak. According to the GM, semis are being released. Target’s stock is plummeting, indicating a mini-panic over fourth-quarter merchandise availability. Assuming a greater reopening effect, won’t we see massive spending shifts away from goods and toward services, relieving many supply pressures? (Source: BCA Research)
Market breadth is strong on NYSE 2:1 up:down stocks, but volume split is slightly less positive.
As usual, the VIX is attempting to bleed lower ahead of the weekend; it did not set a new high this week, but if we hold here or fall further, it could be a minor plus for a firmer footing in the indexes next week.