A Pain Trade May Be Brewing for ‘Growth at Any Price’ Investors

Chris Harvey, the head of equity strategy at Wells Fargo Securities, and his team did the math late in 2020 and came up with a target for where they believed the S&P 500 should end this year: 3,850.

So what is he doing now that the benchmark index has reached that level before January is even over? Standing pat with the target of 3,850. Harvey joined the latest episode of the “What Goes Up” podcast to discuss why he’s not ready to throw in the towel on his conservative target.

He also discussed how Tesla Inc.’s entrance into the S&P 500 reminds him of when AOL joined the benchmark index more than 20 years ago. He sees it as a potential signal of the end of the “growth-at-any-price” type of investing, which could lead to a “pain trade” in 2021 for many fund managers. Some lightly edited excerpts of the conversation are below.

On why he’s sticking with his S&P 500 target:

“We knew that this is a very conservative target and we bias ourselves on the conservative side. Last year, we also had a lower target than the marketplace. And one of the things that was different from us is we had a lot of confidence in it. We never cut our price target. And when things got really dicey, we found real value. We felt comfortable in and around the market lows, telling people to put money to work. Also at this time last year, we ran into a similar situation where people were saying, ‘Hey Chris, are you going to raise your price target? Or what are you going to do?’ We said no. And right now the answer is no.”

“We have very conservative earnings estimates. Part of that is because we don’t know what the tax regime is going to look like. It’s a long year and we’ll see, and we have no problems raising our targets or changing when the information changes. What we really don’t want to do is to cut our target because we don’t want to tell people there’s value there when there really isn’t. And so we tend to err on the more conservative side.”

On why investment opportunities based on stimulus may be short-lived:

“To get to the tax situation: One of the reasons why we see the opportunity being much shorter is it appears to be a rent, not own, type situation. We’re super cheap, right? And frugal as the day is long. We don’t want to stick around for the bill. You’re going to have to pay that bill. You’re going to have to do that before the midterm elections. So that’s saying somewhere in the second half of this year, or the beginning of next year. It’s hard to say granularly what’s going to occur, but we know that we’ve spent a lot of money and sooner or later we do have to pay the bill and we think it’s coming. And so, unlike a lot of my peers, I’m a little bit worried about that because that’s not going to be a whole lot of fun.”

Why Tesla gives him an AOL flashback:

“The Spidey sense is starting to tingle, right? I remember 1998, 1999 and I remember what was happening. You had a lot of speculation, you had a lot of retail investors getting involved. And we have a lot of funny things going on now. But what was amazing to me is AOL at the time was a game changer. It was an amazing technology. The stock had an incredible run, a run I really hadn’t seen before.”

“And it was added to the S&P late in the year at a very large market cap, or very large weighting. That to me was the beginning of the end, right? ‘99 was a fantastic year for stocks, but after ‘99, many of your tech companies and many of your growth companies lost 50% to 100% of their value. Now you have another game-changing technology in Tesla. And you have a stock that has performed amazingly well. And it’s going into the S&P 500 when? December last year. At a very large weight or market cap. This is signaling that we’re close to the end of the ‘growth-at-any-price’ type investment strategy. It’s not a call-out on a particular stock, but what it shows you is that we’ve reached that level.”

“And so back in the late ‘90s, it took 12 months for that, for the regime change to occur. And what I’m telling clients now is in 2020, everything is accelerated, right? Everything that I thought was going to happen more or less occurred, but just in a very compressed time period. So if it took 12 months in the late ‘90s, we think it probably takes six months now for that regime change really to occur.”

On the potential “pain trade” for 2021:

“Funny enough, I think the big pain trade for a lot of people on the buy side is a recovery or a strong recovery, because many people haven’t traded in a post-recessionary environment. Many people have been trading in a low-growth or recessionary environment. And when growth is abundant, different things happen. The market rewards value and small caps and cyclicals and that could cause a lot of pain for much of the buy side, because they’re so steeped in that growth trade.”

To listen to the complete podcast, click here.

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