Monthly Market Update- December 2020
To say that November’s massive surge caught everybody by total surprise would be an equally massive understatement. A fully diversified equity portfolio, propelled most particularly by U.S. Small and MidCap stocks, has risen more than 12%. For the Dow Jones Industrial Average – which crossed the 30K level for the first time ever last week before its month-end mini-pullback – November was the best month since January, 1987. I read over the weekend that this will have been the best month ever (!!!) for Global stocks.
A closer look at November’s market
Let the superlatives roll! The Russell 2000, that Small Cap index referred to a month ago, rose 19%. The Mid Cap Index rose 15%. The Dow Transportation Average rose 12%. As noted above, International stocks were also huge winners with Developed Market stocks up 15% and Emerging Markets stocks up 10%. Within the U.S., energy stocks exploded more than 35%, regional bank stocks soared 22% and brick-and-mortar retail stocks jumped 21%. Within the Transports, it was the airlines that flew (pun intended, of course), with United, American, Delta, JetBlue and Alaska Airline all up more than 30%.
Did any stocks or sectors lag in November?
What was of equal interest were the stocks and sectors that lagged, even though their absolute positive performance would be noteworthy in any normal month. The only FANMAG (Facebook, Apple, Netflix, Microsoft, Amazon and Google/Alphabet) to come close up more than 10% was Apple. Until the two very last trading days, stay-at-home favorites Peloton and Zoom Video were actually down on the month. Gold and gold stocks also fell and I will return to that below.
Any other notable moves?
Other notable moves came in other markets. Led by a 23% rebound in oil prices, a broad commodity index – even despite the precious metals’ declines – rose nearly 7%. Dr. Copper* jumped nearly 12%. The U.S. Dollar index fell to a 31-month low, now trading below the long-held technical support of 92, down more than 2% on the month. For the largest, broadest and deepest market on the planet, this is remarkable volatility. And of course there’s Bitcoin which, despite some late month volatility that would make even the most sanguine traders cringe, closed up about 40%. I will also come back to this below.
Two market game changers- COVID-19 vaccines and the election
As discussed in both November Updates Monthly Update and Mid-month Update we have had two game-changers that have driven the surge. We now have three vaccines in the final stages of preparation for FDA review which is due to occur in the next two weeks. Of course it will take a while to administer enough vaccinations to really make a difference – maybe by late 2Q’21 on the early side. What we’re going through right now with a seemingly out-of-control COVID is just horrible beyond horrible. But at the risk of sounding terribly tone-deaf, on Wall Street it’s the vaccines that matter. On Wall Street, the virus is old news. On Wall Street, it’s all about the economic re-opening story. With a 45% increase in the money supply in just the past 12 months to fuel it, that story is very powerful.
The second is of course the election. After any major event occurs, Wall Street does its own version of voting as it projects its implications into the future. 13+% is a pretty decisive margin as to how it feels about the outcome. Even without a Democratic Senate – though I believe the story gets vastly more powerful with it rather than without – Wall Street sees a double-barreled stimulus story in 2021. The first will be in the form of the long-delayed second COVID relief package. This will put funds in the hands of those who need them and will spend them, rather than in the hands of those who will simply save more. The second is the projected inevitability of a major infrastructure program focused on building long duration productive assets, versus those immediate past policies that encouraged short-duration ‘transactional’ – and therefore unsustainable - consumption. This will be the economic ‘re-boot’ I’ve been regarding as necessary for the past two years.
Disruption is far from over
Moreover, whether you call it chaos or, more charitably perhaps, planned disruption, the never-ending angst coming out of the White House is going away. Any high-profile factor that does nothing but generate uncertainty – be it economic, political or social – depresses price levels on Wall Street. The less certain you feel, the less you’ll pay. Policymaking in 144 impulsive characters has been chaotic and disruptive. No more.
Two weeks ago, we released a mid-Month Update that outlined our increase to our stocks allocation from what I’d termed ‘ferociously neutral’ a month ago to a modest overweight. We did so by shifting 4% within our balanced models from bonds to stocks, adding 2% each to SmallCap and Emerging Markets, taking our active underweights to neutral (exposure versus our internal allocation model). Last week, we extended that EM stocks bet even further, adding 3% more by reducing our U.S. Large Cap position. We also extended our EM debt weighting within our fixed income models.
Gold – we introduced this to model-based client portfolios in mid-summer as a hedge against potential bad market outcomes resulting from COVID and the other major uncertainties of the time. So I suppose its 5+% decline in November should come as zero surprise. But even though our expectations for stocks are now considerably more optimistic, we are not souring on gold at all and may well add to it.
Should the dollar’s current break below 92 prove sustainable, it could open the door to sub-90 levels, putting pressure on Wall Street to find a true ‘alternative currency. So far that focus has been on Bitcoin and the other cryptos. But these are still the province of high-octane hedge funds and traders. One can almost see those folks selling gold and buying crypto all through November, day after day after day. But then came that 17% out-of-nowhere crash, then the 20+% immediate recovery, over just the last four trading days. This volatility is not exactly comforting to mainstream Wall Street. So if/when that pile of capital takes up the hunt, I can’t imagine gold won’t come back into focus. Gold has fallen – or ‘contended with’ (see below) – more than $300 from its near $2100/oz early-August high.
“Backing and filling” possible during first few weeks of the month
Near-term, after this massive run to the upside, nobody should be surprised if the first few weeks of December show some backing and filling from these high levels. In my experience, every meaningful high like Dow 30K (or low like the U.S. Dollar index at 92) needs to be ‘contended with’**, meaning that there is often a ‘challenge’ that tests the depths of investor conviction about the future. Those levels become ‘resistance’. This challenge could be in terms of both time and price, duration and magnitude. With sentiment now very positive, maybe to a near-term fault, virtually any reverse catalyst (bad vaccine news, perhaps) can force that challenge. But our position is that any such challenge will likely be met successfully. And those resistance levels are surpassed and then become ‘support’. And then eventually get left in the dust.
Long-time readers of my Updates will recall my annual rapture over the Macy’s Thanksgiving Parade, a showcase of pure happiness about all that’s good across all societal and cultural aspects of our great country. The 2020 COVID version was appropriately dialed back but it happened…and it was great! Yes, it’s highly likely that it will be awful COVID-wise for months ahead. We will mourn all tragic losses, past and future. But as stewards of wealth, we at KLR Wealth can, and must, look even further ahead, to where the light shines at the end of the COVID tunnel. At the end of November, it’s more than just a glimmer.
Please have a safe and happy holiday season. Your questions and comments are most welcome.
*Given its widespread utilization across almost all sectors and industries, the price of copper is widely credited with having a PhD in Economics, given its general accuracy in predicting turning points in global economic activity. Note the word ‘general’ – it’s not infallible.
**I give Carter Worth, the Chief Technical Analyst at Cornerstone Macroeconomics, full attribution for this turn of a phrase.
Published on: 11.30.20