Everything Is Different Now. Or Is It?
The month began with an election that didn’t resolve uncertainty, it generated more. From there, a seasonal surge in coronavirus positivity rates created uncertainty and fear, particularly around the upcoming holiday season. Economic data reflected individual concerns, as the Conference Board’s Consumer Confidence Index fell to a lower-than-expected 96.1, and household income began to deteriorate from previous increases. Along with this, initial unemployment reversed a downward trend and began to see consecutive weeks of increases.
Did investors hunker down and turn the risk switch firmly to the “off” position? Nope. The outcome of the election, with a likely Biden win but a divided Congress, was decidedly good news. Markets don’t like uncertainty, and this outcome seems to promise status quo with some positive signals around the edges.
And then, with the news of multiple coronavirus vaccines likely being deployed before the end of the year – and full roll outs over the next several months – it was “all gas, no brake.”
All three major U.S. stock indexes had a knockout month: The S&P 500 rose 10.75%, The Dow Jones Industrial Average notched 11.84%, the biggest monthly hop since 1987 and it breached 30,000 for the first time ever. The Nasdaq Composite gained 11.8%
Breaking down the rally, investors appeared to be aligning with a longer-term view of economic recovery. Cyclical stocks were rotated into as investors looked towards the next stage of economy. Investors continued to prefer value stocks over growth stocks. This marks a shift away from the big tech stocks that drove the market recovery earlier this year.
The month-long rally was broad-based, as the stocks of companies that have been left behind in our new pandemic-focused world came back into favor, and smaller-cap stocks also participated with record-breaking gains.
Higher quality assets, such as investment grade corporates, performed well past the first half of the month, particularly on the longer end of the duration spectrum. For the week of November 20th, investment grade corporates outperformed all other fixed income sectors. By the following week, the bond markets were fully participating in the risk on sentiment and high yield was the star performer – making it the best performer for the month.
Treasury market yields were largely flat, with the ten-year note taking an interesting trip as investors moved out of safe haven assets – and then back into them at the end of the month- making the ten-year yield jump more than 10 basis points before settling back where it started.
The Thanksgiving holiday resulted in a light month for municipal new issuance, but low interest rates continue to be supportive. An interesting development in municipal supply as gaining traction – taxable municipals have seen issuance so far this year that is double last year.
At month end, stocks declined a bit as the reality that COVID isn’t disappearing right away settled in. There were some surprises in the data, such as a decline in pending home sales, that reminded investors we have several tough months to go, and conditions are deteriorating all the time. Stimulus talks have recommenced, but even if there is a package before year end it is likely to be only a fraction of what a sustained recovery needs.
What Should Investors Do?
There is definitely rationale for a positive outlook – but there’s a big gap to get over before the reality on the ground catches up to the forward-looking stock markets. And until then, the markets will be vulnerable to setbacks and bad news. And this will create volatility.
It’s December, so we always recommend taking stock of where you are in your planning, if your goals have changed, or if any part of your situation has changed. Making sure that you are planning for the things you have under your control is the most important part of a healthy financial strategy. If you have any questions or want to talk, feel free to reach out to me. KB