Trends Watch: Equity Markets

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Martin Herzberg, Managing Partner, AlphaTheta Capital.

What is your outlook for 2021?

I am very concerned about the current extremely bullish sentiment regarding the outlook for equity markets. Having said that, I do think we are positioned for a strong 2021. Companies have done a great job reducing costs during the COVID-19 period, and future earnings should be strong. The rollout of vaccinations will hopefully put COVID-19 in the rearview mirror within a year. Janet Yellin is a monetary dove and, together with Jerome Powell, we are likely to see more easy money for the foreseeable future. Prospects are improving for companies left behind by the pandemic, and that is being reflected in their recent stock prices.

So do you expect the equity market to continue higher from here?

Not in a straight line. Stocks are overbought and, as I said earlier, sentiment is too bullish at this juncture. We are likely due for a correction in the not-too-distant future. Many investors may be holding off selling until 2021 in order to defer taxes on their gains. Equity markets are also near all-time highs, while bonds have sold off recently thereby necessitating a rebalance of equities into bonds by many institutions to meet clients’ target investment objectives. However, I would view a selloff as a buying opportunity.

Where do you see the best opportunities?

The current easy money policy will cause the U.S. dollar to continue its decline. This bodes well for emerging equity markets, which have lagged the developed markets and are well-positioned for long-term appreciation.

Given their valuations and product pipelines, I also find health care stocks attractive. I also favor financial stocks. As the vaccines become widely administered, causing a reduction in the pandemic’s negative impact on the economy, we will see a recovery and a steepening yield curve. This, combined with potential buybacks, should propel financials higher.

Options volume has exploded recently, providing increased liquidity. Investors can utilize a variety of options strategies to generate alpha while controlling for downside risk.

What keeps you up at night?

I am concerned that if the decline in the U.S. dollar accelerates, we might see disruptions in currency markets with substantive consequences elsewhere. I’m also worried that the easy money policy could eventually lead to inflation and a spike in interest rates causing a bear market in equities.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.