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People have to keep in mind that next year won’t be all ‘sunshine and rainbows’: Joe Fahmy

Joe Fahmy, Zor Capital, LLC Managing Director, joins Yahoo Finance’s Julia La Roche and Adam Shapiro to discuss the markets heading into 2021 and where investors should be looking with new political and social policies impacting the markets.

Video Transcript

ADAM SHAPIRO: We want to bring in Joe Fahmy, Zor Capital LLC, to talk about some of the lessons that we have learned in 2020. And I think the biggest lesson is let's get out of 2020 as fast as possible. But, Joe, what would you say?

JOE FAHMY: That that would be a great start. And thank you for having me on, Adam. I think when you ask investors what's the biggest lessons they learned from 2020, you'll hear some common themes. One of them being don't fight the Fed. One of them being I should have turned off the news. One of them should be I should have followed price action. And all those apply and are important, because I think they're also going to apply to 2021.

With regards to the Fed, that situation's the same, where we're still in a low interest rate environment, where they're pumping tons of liquidity into the system. And that provides a good equity-friendly backdrop for stocks.

Regarding price, there were a couple of events we had in October and November. I don't want to bore the viewers with the breath thrust indicators and so forth. But bottom line is they showed an extreme appetite for stocks from the big institutions. And when these events happen, they tend to be rare events that lead to higher prices 12 months down the road.

For example, in the first week of November, during the week of the election, the S&P 500 was up three days in a row over 1.5%. And that's a rare event that's only happened nine times since 1970. And all nine were higher six months later by an average of 14% and a year later by an average of 22%.

JULIA LA ROCHE: Hey, Joe. It's Julia. I referenced earlier some of the articles you have written, including one back in September of 2019 where you said the Dow would hit 30,000 in 2020. You have a new piece on yahoofinance.com. Let's pick up on this.

Where do you expect the markets to head in 2021? I'm definitely getting a bullish tone from you. And also, how do you kind of deal with the inevitable pullbacks that you might be expecting along the way?

JOE FAHMY: Yeah, that's a great question. I mean, I'm basically still-- you're right about the bullish tone. Mainly because two main things control the markets, which is earnings and interest rates. Earnings are forecasting a recovery and interest rates are going to be low.

And it's difficult for a lot of money managers, and even regular market participants, because we're not used to such a low interest rate environment for a long time. However, people do have to keep in mind this isn't all going to be sunshine and rainbows. For example, I still think we're going to see a pullback in the first quarter. An average correction of 8% to 12% would be normal. Keep in mind, for the last 50 years the market has averaged an inter-year decline of 14.5%. So, a 10% correction would be normal, especially to shake out some of the excess bullishness that we're seeing.

And to your question about how people should deal with this, it really depends on if you're an investor or if you're a trader. If you're an investor and you're in it for the long run, you have to stick to that plan. And if you're a trader, there's nothing wrong with taking some profits into strength to have some cash for those inevitable pullbacks.

ADAM SHAPIRO: Nobody ever got poor taking profits too early. But I got to ask you. When you were talking about earnings being a market driver, I'm thinking of previous discussions regarding Snowflake, regarding Tesla.

I think a lot of investors are willing to ignore that earnings should be a part of their decision-making process. What do you say to them?

JOE FAHMY: Yeah. There is something where Wall Street's a discounting mechanism. And I remember Yahoo trading at 603 times earnings back in '98 before it went on a 3,000% run. And even Apple was trading at 70-80 times earnings before it went on a huge run, as well.

But the point is that Wall Street tends to forecast what's going to happen sometimes even 5-10 years down the road. And then when all the earnings do come in, the stocks end up not moving because they've already priced in a lot of that move.

But the other factor to consider is we've never been in such a low interest rate environment for so long. So, you can't use traditional valuation metrics to value companies right now. That's why I like to default to some of the technicals to follow what the big institutions are doing.

JULIA LA ROCHE: And Joe, it's Julia again. Let's talk about some of the events that could be moving markets in 2021, specifically the run-off in Georgia. How are you thinking about that? How are you also thinking about the policy side of things, and folks that might say, you know what, I'm going to go ahead and take some profits, I'm going to sell, I'm going to get out of this market because of how things might play out. Walk us through that.

JOE FAHMY: Sure. There's a few events, and I discussed them in the article. Number one, just being a delaying of taxes. For example, some people have some nice gains on some stocks this year. They might wait till January to sell them to delay their tax burden until 2022. So, that's one factor.

You also do have, as you mentioned, the Georgia Senate races. That's going to be very important hurdle for the market to get through, because that could affect corporate taxes, which would mean they would have to lower the estimates on the S&P. It could also affect capital gains and other taxes, as well. And then also the smooth transition of the new presidential administration.

So, there's always going to be some bumps in the road. That's why, as I said, the equity-friendly backdrop is there. But there's still going to be some hurdles and, of course, geopolitical events which are unforeseen if anything like that happens.

JULIA LA ROCHE: And Joe, real quick before we let you go. I mentioned that you called Dow at 30,000 back in September 2019. What's your view, what's your target in 2021?

JOE FAHMY: That's a good question. I'm expecting about a 10% to 15% year for the markets. Maybe even a little bit higher for the NASDAQ. I think when we do get-- if we do get that correction in the first quarter, it'll be a viable event and there'll still be a nice earnings recovery. As we open up the economy in the second half of 2021, the markets will, I think, forecast that and drive us higher.

ADAM SHAPIRO: All right. Joe Fahmy, we look forward to seeing you perhaps in 2021 if not sooner. There's still time in 2020. But we want to wish you all the best. Joe Fahmy is Zor Capital. And he is at Zor Capital LLC. All the best to you.