A broad sell-off in the stock market looks less likely as rolling corrections hit tech and energy

  • A broad sell-off in the stock market looks less likely as rolling corrections hit tech and energy, according to Fundstrat

Matthew Fox
  • The chances of a broad sell-off hitting the stock market in the first half of 2021 are diminishing, according to Fundstrat’s Tom Lee.
  • Rolling corrections in certain sectors like technology and energy have diminished the chance of a big sell-off, Lee said in a note on Friday.
  • Technology, energy, and small cap stocks have all experienced declines of more than 10% in recent months.
  • The chances of a broad sell-off hitting the stock market in the first half of 2021 are diminishing as rolling corrections hit certain sectors, Fundstrat’s Tom Lee said in a note on Friday.

Since the start of the year, technology and growth, energy, and small cap stocks have all experienced sell-offs of at least 10%, Lee highlighted.

“Because of this recent suite of rolling corrections, we believe the prospects for a larger correction in 1H2021 have largely diminished,” Lee explained.

Tech stocks have sold off on fears of inflation and rising interest rates, while energy and small cap stocks have taken a breather in recent weeks after staging over-extended rallies on the reflation trade.

Four structural factors driving this change in 2021 include the first real rise in long-term interest rates not driven by the Fed in decades, rising inflation expectations, a less business-friendly Biden administration that is mulling a rise in the corporate tax rate, and the re-opening of the US economy.

“Each of these individual factors would be difficult for a fund manager to discount. But 2021, these 4 are happening simultaneously. Moreover, the first two factors have not been part of the investment playbook for a generation, so it is natural for markets to be uncertain,” Lee said.

To navigate the uncertainty of the markets, Lee suggest investors buy cyclical stocks poised to benefit from a strong reopening of the US economy as the COVID-19 pandemic subsides.

“Energy is really the sector facing the best tailwinds in 2021,” Lee said.

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