Thread by @JonahLupton

10 reasons why the stock markets will go up another 10% this year 🚀

As someone that spends a lot of time studying markets and investing in stocks I’ll always be more optimistic than the average person because I know over the long term stocks always go up.

Hope you enjoy👇🏽

1) Right now the S&P 500 is trading at 21x 2021 earnings assuming $165 of earnings. 21x is higher than the historical average of 14-16x earnings but we’re also dealing with some incredible tailwinds including historically low interest rates.

The S&P 2021 earnings yield (FCF) is above 4.6% which compared to the 10-year treasury at .72% makes the S&P look attractive. Why would anyone want to put their money into treasuries or fixed income right now if they have a long term investment time horizon.

If I needed yield right now w/ a 5+ year investment horizon I’d be 90-100% stocks with at least half in dividend paying stocks w/ an average yield of 3-4% or approx 5x higher than the 10 year treasury. I believe more pension funds & endowments will adopt this investment strategy.

The broad markets are typically pricing in 6-18 months into the future which means the big fund managers are looking at 2021 and 2022. They don’t care about 2020 b/c the biggest economic risks are now in the rear view mirror. There’s a lot of reasons to be bullish on the future.

2) The Fed and Treasury have flooded the financial system with trillions of dollars in excess liquidity to stabilize the credit markets and keep individuals and companies solvent. As the economy rebounds much of this excess liquidity will go into risk assets like equities.

Yesterday Jerome Powell basically said they are not worried about inflation and expect to keep rates low for a long time which is code for “buy risk assets because we’re going to keep pumping cheap money into the financial system”

3) Mutual funds and hedge funds are sitting on hundreds of billions in cash and will need to play catch-up the next 4 four months. Mutual funds and hedge funds are always compared to benchmarks which impacts their inflows & outflows as well as their bonuses & performance fees.

Many of these funds not only got hammered in March when the markets collapsed but they were invested too conservatively during the rebound due to fears for a second market meltdown which never came. Now they have to play catch-up otherwise their 2020 performance will be horrible.

4) It’s very likely that Congress comes back early from their Summer break and gives us a $2 trillion stimulus package. Neither party wants to hold this up too long due to fears of a backlash in November at the polls. Both parties are motivated to get something done.

5) Between now and year end we will see more positive news about better/faster testing as well as vaccine trials. Every time we get something new on either front it will give the markets a shot of adrenaline 💉

The bigger question is whether we see a legit rotation into value.

6) The US stock markets are still the best and safest in the world. International investors will never stop buying shares of our companies because US companies are the global leaders in every single industry. There’s no better place to start or run a company than the USA 🇺🇸

7) The markets are not a reflection of what’s happening across the country to small/mid sized business. On average the largest companies ie S&P 500 have managed this pandemic very well because they had the capital and resources to do so.

Unfortunately millions of small businesses like retail stores, bars, restaurants, gyms, etc were not so lucky. They relied on local foot traffic and face to face customers which dried up with the state mandated shutdowns. They’re not setup for online business only.

Sadly I believe we’re going to see a lot of bankruptcies over the next year from small/mid sized businesses but this doesn’t reflect the continued strength in corporate America. The biggest companies are just getting bigger at the detriment of smaller companies.

8) With millions working from home and spending less money it makes sense they’d put more money into stocks. With savings accounts at all time highs and commission free trading on most investment platforms we have seen massive spikes in retail volumes this year.

Retail investors alone are not moving the prices of larger stocks but they can influence sentiment and institutional investors have to take that into consideration. If the average person is feeling bullish those big fund managers need to stay invested too.

9) The 5 largest stocks in the S&P 500 which is $AAPL $AMZN $MSFT $GOOG and $FB account for more than 20% of the index. Each of these companies were built for this new digital economy ie e-commerce, hardware, software, social, digital payments, advertising, search and so on.

There’s no sign of these companies slowing down. In fact this pandemic only made them stronger. These companies are growing at 20-25% and generating insane amounts of free cash flow. I believe these 5 companies are sitting on $400B+ of cash right now.

Remember, every month tens of billions of dollars flow into passive ETF’s which means 20% of those dollars go into the big 5 companies which is why I will continue to own all of them. Not only are these businesses strong but the continuous ETF inflows are helping them.

Would anyone in their right mind bet against these companies right now? Perhaps they’re selling at lofty multiples compared to their P/E’s from a few years ago but the world has changed and these tech companies are the future with enormous moats that deserve a premium multiple.

10) Elections usually bring uncertainly and volatility, I suspect the 2020 election will be no different but there’s a decent chance we see the markets rally into November on bullish economic talk from Trump and Biden. Both candidates need to sound pro-business and pro-economy.

I believe the markets would prefer a Trump win in November because he’s much more likely to keep personal & corporate tax rates lower including cap gains however a Biden win could mean more stimulus and government spending which might put more money into the consumers pocket.

If we’re being honest I’d expect a 4-6% rally with a Trump win (within 2 weeks) and a 4-6% pullback with a Biden win (within 2 weeks). If the Dems take the White House and the Senate we could see an 8-10% selloff between November 4th and early January.

America is a country built on innovation, capitalism and entrepreneurship.

Despite our political differences and the struggles many Americans are facing we will get through this and we will be stronger for it.

I will continue to be bullish on America and our great companies 🚀