Stocks could see all-time highs before year-end, top strategist says. How he'd play it

Stocks could make another run at record highs before the year is out, says one top strategist.

The major averages closed in the red on Friday after a week marked by uncertainty around congressional stimulus talks. But while the market does face near-term hurdles, new highs are not far out of reach, Federated Hermes chief equity market strategist Phil Orlando told CNBC's "Trading Nation."

"There could be some more chop over the next week or so," Orlando said in a Friday interivew.

He cited the market's recent record rally — the S&P 500 is up 12% since the beginning of November — as well as the latest spike in Covid-19 cases, congressional budget discussions, stimulus talks, an upcoming Brexit deadline and the Senate runoff races in Georgia as the headline risks in the coming weeks.

"We're optimistically saying that we're going to get through some of these hurdles near term and get to that 3,800 level by the end of the year," Orlando said.

"There's a lot of good things in the pipeline if things break right," particularly on the Covid vaccine front, he said. "We've got to get through a couple of these hurdles over the next few weeks and, to a significant degree, that will determine the pace of continued improvement over the course of calendar '21."

At this point, one of two things would persuade Orlando to add to his firm's 4% overweight exposure to equities.

"There are two things we're waiting for, either some resolution on some of these hurdles that we've just laid out or perhaps better prices," he said. "We're being very patient. And either a resolution of those issues or better prices will allow us to step in and put some more money to work."

For him, a 5-10% market decline coupled with a "relatively smooth" vaccine rollout in the United States "would be enticing" enough for him to up Federated's exposure to stocks, he said.

"We're not going to force this. From where the market is right now through the end of next year, we think we can do 15% or so to our 4,200 target on a total return basis and that's pretty good," Orlando said. "At this point, we're just going to be patient and let the market come to us."

If it does, Orlando said he would stick with his firm's strategy from mid-August when buying into the market. Federated had $615 billion in assets under management as of the third quarter.

"At that point, we felt that domestic large-cap growth stocks, largely led by technology, had gotten ahead of themselves. We took that sector back to neutral and allocated the money into three other areas — domestic large-cap value, small caps and international," he said.

The gap between large-cap growth and the other side of Federated's strategy was so large "that we think that that trade will continue to bear some fruit," Orlando said.

"So, as we're putting new money to work, it's those three areas — international, domestic large-cap value and domestic small cap — that we think would get the incremental dollar at this point in terms of what we think will play out over the course of the next year," he said.

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