Craig Johnson on 2021 Market Outlook, Energy and "Green" Metals

Thu, Feb 18, 2021 - 3:21pm

"Bullseye" Craig Johnson at Piper Sandler is one of the most accurate forecasters on the stock market we speak with on our Financial Sense Newshour podcast. Each year he gives a year-end target for the S&P 500 and, amazingly, continues to predict where the stock market is likely to end up 12 months ahead of time. It's for that reason our firm decided to just start calling him "bullseye".

Here's what he had to say about his outlook for 2021 on stocks, interest rates, and more (see Bullseye Craig Johnson on What to Expect for 2021 for audio).

Good, Not Great

This year should see stocks do well, Johnson noted, but overall he doesn’t expect it to be an outlier year in terms of performance. His anticipation is that we finish 2021 at 4,225 on the S&P 500.

Moreover, he does not expect the move higher to be linear with a possible pullback starting as early as February.

The market has risen sharply, he noted, and some of market internals indicators suggest we’ve overheated to a degree.

Coupled with a potential correction earlier in the year, Johnson expects some sector rotation to take place. During these pullbacks, typically all sectors come into play, Johnson noted, but he’s starting to see value outperforming growth, small caps outperforming large caps, emerging markets outperforming the S&P, and global markets outperforming the S&P 500 index.

Johnson says that 10-year bond yields are beginning to rise and we could see a move up to 1.50% to 1.75% by yearend. If the happens, we could see rotation into financials and other interest rate-sensitive sectors of the economy, with weakness in REITs and staples to follow.

He also expects that we are going to see some rotation towards early-cycle type names that would also include a pickup in basic materials, industrials, and even energy.

“We're setting ourselves up for what I think will be a pretty interesting setback and correction,” Johnson said. “Not to get overly precise, but I have to point out that in the first year of a new presidential cycle, February is often quite weak. … The maximum drawdown that you see in the first year of a presidential cycle is 16.8 percent. But that is a dip to be bought. Then, at 4, 13 and 26 weeks later, you're higher 7.7 percent, 11.32 percent and 13.11 percent.”

Energy and "Green" Metals

President Biden’s administration is expected to push hard for green initiatives, Johnson noted, and he expects energy to benefit. Recently, energy-related equity funds took in $2.8 billion, according to Lipper money flow data, marking the 16th straight week of positive inflows, Johnson stated. This is the longest on record since 1992.

While the public is focused on electric vehicles, other segments of transportation, such as airlines, will have more difficulty adopting electric options, Johnson noted.

In light of the push for EV options, copper and silver are both expected to outperform. Most EV vehicles use up to four times as much copper as traditional internal combustion powered models, and silver is necessary for solar panels.

With infrastructure spending likely to ramp up, Johnson added, he believes steel should see a boost higher.

“I don't really think that the well-publicized demise of the energy sector is on the horizon anytime soon,” Johnson said. “Base metals are doing absolutely fabulously. Copper has broken out above prior highs. It's a very nice constructive technical breakout, and it looks like there's more room for copper to run.”

Retail Apocalypse?

While brick-and-mortar retail has been hit hard during the Covid crisis, Johnson expects some surprises in an environment where many have been anticipating the death of retail for some time.

An interesting indicator is appearing, he noted. If we look at names like Kimberly Clark and Beyond Meat, their chart set-ups suggest we should be reducing positions. The relative strength trends between the two are quite different, and more weakness is appearing in the staples, Johnson noted.

That's ultimately very bullish, he stated, adding that the defensive parts of the market are coming off, while more offensive players are coming out.

Money paid to consumers for payroll protection has been sitting on the sidelines, Johnson added, suggesting auto purchases may be set for a rebound, and housing is in the process of consolidating, though he expects this will ultimately turn out to be a pause that is refreshing for consumers.

Many retailers have moved toward an online business model, though we may get a surprise as consumers come out of pandemic lockdown.

“I'm not sure that the larger departments are ultimately going to go away,” Johnson said. “I think they're probably going to shrink a number. … As more needles go into arms, we're going to see people wear their masks. They're going to go out and they're going to say, ‘I want the experience of going out to the mall and seeing people. We’re going to see a pickup in people going back to some of the mall-based stuff, initially. I don't see that venue ultimately going away.”

Secular Bull Intact

Ultimately, the bull is still in control, Johnson stated. There are two risks, though.

If vaccination efforts ultimately prove ineffective, and herd immunity is not achieved sometime halfway through 2021, we would likely see a larger economic impact and more stimulus injections.

Another risk factor is if interest rates head meaningfully higher. This could have several negative consequences for the economy, Johnson stated.

Outside of these factors, he believes the longer-term move is still higher.

“I don't think the secular bull market is over,” Johnson said. “This is going to be a correction within the context of the longer-term secular bull market. … If interest rates all of a sudden take a meaningful lift higher, and we are looking at 2 percent on the 10-year bond yield, that would be the proverbial bull in the China shop that would break a few dishes. But I think that could be quickly corrected by the Fed, and certainly their calming words and language would lead to smoothing and more bond buying.”

To listen to our full-length interview with Craig Johnson at Piper Sandler, click here. If you're not already a subscriber to our FS Insider podcast where we interview book authors, strategists and industry experts from across the globe 3 days/week on all things economics, finance and markets...

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Written by Ethan D. Mizer

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