November 2020 Insights

Markets Rally around the World following Election Day & Vaccine News

  Key Observations:

  • Expectations of effective COVID-19 vaccines, highlighted by Pfizer’s November 9 announcement, propelled the market higher and initiated a shift from 2020’s big winners and to underperforming asset classes and sectors.
  • Much anticipated market volatility surrounding the election never came to pass.  Investors seemed to view a likely divided government as good for the economy and good for the stock market.
  • The recent COVID surge and lockdowns threaten a resilient economy that has seen robust consumer spending and a record setting boom in the housing market.
  • US interest rates continue to be historically low with no end in sight.  In its most recent economic projections, the vast majority of Fed officials stated they expect rates to remain near zero through 2023.

Market Commentary:

The stock market was remarkably stable leading into and through the election. Certainly, the prospect of a divided government helped. It is an outcome that equates to more predictable and moderate changes in fiscal and regulatory policy.  That’s good for stocks. With Election Day behind us, investors expect a COVID relief package is more likely to come to fruition, again good for stocks.  Since Election Day, the S&P 500, DOW Jones Industrial Average NASDAQ Composite have gained 9.4%, 10.1% and 11.3% respectively.

Then there were the expectations of a COVID-19 vaccine, and subsequently Pfizer’s milestone announcement on November 9.  As a vaccine provides us hope for a return to normalcy sometime next year, it provides investors motivation to shift their focus to underperforming sectors that will benefit from more open economies and a broader recovery.   Before Pfizer’s announcement, the Morningstar indices for energy and financial services were down a miserable 49.3% and 11.5% for calendar year 2020.  Since the announcement, these economically sensitive sectors have rallied 23.8% and 9.5% and significantly outperformed the big “stay-at-home” winners of 2020, technology and communication services which rallied by “only” 2.8% and 2.1% during the same time period.

This rotation was also noticeable in the shift from growth to value stocks and large cap to small cap stocks.  Value stocks finally came to life in November. After trailing growth stocks by an incredible 42.7% for the first 10 months of the year, value stocks returned 9.2% since Pfizer’s announcement compared to less than 1% for growth stocks.  This is especially true for small-cap value which returned a dismal -21.6% through October but has returned a robust 20.4% in November.

Let’s not forget about fixed income.  Even in this low interest rate environment, bon

ds have continued to perform well.  The broad US bond market as measured by the Bloomberg Barclays US Aggregate Bond Index returned 1.0% in November and an impressive 7.4% year-to-date.  Given 2020’s economic uncertainty and muted inflation expectations, higher quality and longer-term bonds have led the way.  Long-term Treasuries have returned a notable 19.1% year-to-date and 1.2% in November while investment grade corporate bonds are up nearly 11% in 2020 and over 3% in September alone.

Economic Commentary:

The pandemic has changed our lives in so many ways and how and where we spend our dollars is no exception.  Travel and leisure have been replaced by digital entertainment and trips to Lowes.  After an initial dip when the first wave of lockdowns occurred, consumers have been spending and spending a lot.  In the third quarter, GDP grew at a record 33% on the back of the consumer.(i) According to the Bureau of Economic Analysis, personal consumption increased and incredible 41% from the previous quarter.  And investors are not shying away from big purchases either.  The pandemic, fueled by record low mortgage rates, has triggered a demand for single family homes not seen since the housing euphoria of the early 2000s.(ii) Last week the National Association of Realtors reported existing home sales surged 4.3% in October at the fastest pace in 14 years.

There are reasons for concern. The economy faces serious headwinds as shutdowns have been resumed in many states and the impact of stimulus checks and enhanced unemployment payments have faded.  Recently released data shows consumers have begun to pull b

ack.  The Commerce Department reported October retail sales rose 0.3% missing the forecast of 0.5% and September retails sales were revised downward from 1.9% to 1.6%.  The ability for the consumer to hold up the economy will certainly depend on the course of COVID, the breadth and depth of lockdowns and the ability of our government to pass an additional stimulus package.

It should be noted the Federal Reserve is doing its part to encourage economic growth.  Following its two-day meeting last week, the Fed released its quarterly economic projections and statement indicating their commitment to keep rates at zero through 2023.  The resulting low borrowing costs is an incentive for business spending on capital goods and household expenditures on homes, cars and other durables.  This spurs economic growth and jobs.  It is also a long-term bullish environment for stocks as sustained low bond yields push investors to paying more for risky assets such as stocks.

Final Thoughts:

While the preceding market data and economic information is meaningful, it is in the rear-view mirror.  The market considers and prices in expectations of what lies ahead. At CAM we believe we have positioned our investment portfolios to benefit from a broadening economic recovery in 2021.  Although it is tempting to chase the returns of growth stocks, we implemented a small overweight to value/core stocks on the conviction that investors will continue to price in less risk (resulting in higher prices) for these more economically sensitive sectors. Our strategy for growth stocks is to be selective and focus on those companies that are and will benefit from the application of disruptive technology – the driver of the current, third industrial revolution.

Lastly, we continue to believe an allocation to bonds is prudent and necessary for most investors.  There will always be new walls of worry for the market to climb and 2021 will undoubtedly deliver new challenges.  Bonds provide downside protection and performance when there is turmoil in the stock market.  As described earlier, 2020 is an excellent example of how even in a low interest rate environment bonds can provide meaningful returns.

Sources:
(i) Bureau of Economic Analysis:https://www.bea.gov/news/2020/personal-income-and-outlays-september-2020
(ii) National Association of Realtors:https://www.nar.realtor/newsroom/existing-home-sales-jump-4-3-to-6-85-million-in-october

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Note: All performance data in the following two charts were drawn from Morningstar.

 

Disclaimer: The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All data is as of the end of November 2020 unless otherwise noted. Data sources include: www.morningstar.com. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

 

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