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- 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.
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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.
The change in leadership within the stock market has led to a choppy range of trading, with tech and energy switching places for 2020 and 2021. Tech is now the worst performing sector within the S&P 500 so far in 2021 after being the winner in 2020, while the energy sector is the best performing so far this year after suffering in 2020.
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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