- Bank of America recently released its 2021 stock market outlook. Strategists led by Savita Subramanian detailed their preferred sectors, key investment themes, and a 2021 year end S&P 500 price target of 3,800.
- The strategists told investors 2 critical rules to follow for higher returns: extend your investment horizon and avoid panic selling.
- Subramanian’s team also highlighted why value stocks are poised to make a comeback next year.
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Bank of America strategists say the S&P 500 will climb to 3,800 by the end of 2021—a 6% gain from current levels—but the path won’t be a straight ride up, and the team cautioned on near-term risks. In a 2021 outlook note, strategists led by Savita Subramanian laid out two rules every investor should follow for the next 12 months.
Rule #1: Extend Your Time Horizon
“Historically, lengthening one’s time horizon is a recipe for loss avoidance: 10-yr S&P 500 returns have been negative just 6% of the time. Other asset classes do not sport such characteristics – for example, the same 10-yr loss rate for commodities is 30%,” said the strategists.
Rule #2: Avoid Panic Selling
The strategists also cautioned against “panic selling.” Selling stocks when the market is trending downwards may feel like a way to protect against additional losses, but research shows staying in the market even on the worst days leads to higher long-term returns.
“The best days usually follow the worst days for the market. Since the 1930s, if an investor sat out the 10 best return days per decade, his/her returns would be just 19% compared to >16,000% (16,485%) returns since then,” the strategists added.
Bank of America has an overweight rating for financials, energy, tech, and healthcare, while rating consumer staples, communication services, and real estate as underweight for 2021. Subramanian said the top two sectors—financials and energy— are “unapologetically cyclical and value-focused,” and reflect BofA’s preference for value stocks over growth stocks.
“Value is the new growth sector,” Subramanian said in a Tuesday webinar.
She added: “Value is a theme that hasn’t worked for quite some time because we’ve been in an environment of weak economic growth and very low interest rates and we haven’t necessarily seen a full-fledged economic cycle.
However, in the three-month period after the last 14 recessions, a value strategy has outperformed a growth strategy said Subramanian. She added that the Rusell 1000 value benchmark has a higher projected earnings growth than the Russell 1000 growth benchmark.
Her team also highlighted potential risks to the stock market in the year ahead.
“The recovery is intact and the world likely re-opens in the 2H, but a lot of optimism is priced in already on vaccine/recovery. Vaccine execution risk, delayed fiscal stimulus and longer lockdowns are risks,” the strategists added.