“The one fact pertaining to all conditions is that they will change.” – Charles Dow
November turned out to be one heck of a year … errrr, MONTH!!! … for investors. If you take a look at the returns listed below those are not typos you see, but the real monthly returns for the equity markets we follow. As that was happening the Bloomberg Barclays Agg Bond index also produced a solid1.04% gain and the commodities index was higher by 8.25%. The US Dollar Index lost 2.30% for the month – the lone loser for the month.
A lot happened over the 30 days of November. Let’s dig in.
|
U.S. & International Stock Index Returns |
| Total Returns |
| Index November 2020 Year-to-Date |
| Dow Industrials 11.00% 3.86% |
| S&P 500 10.89% 12.10% |
| S&P 400 (Midcap) 13.00% 5.11% |
| S&P 600 (Small Cap) 15.47% 1.31% |
| MSCI World 12.40% 9.53% |
| MSCI EAFE 13.44% 0.83% |
| Bloomberg Agg. Bond 7.36% |
| CRB Commodity Index (13.85%) |
| US Dollar Index (4.77%) |
All data as of 12/01/2020, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
At the end of October there was a lot of worry among the investors we talk with on a regular and not-so-regular basis. A contentious presidential elect can do that. But this is 2020 so there is so much more going on – the pandemic has been surging, recounts are happening in a number of states, and the economy appears to be slowing down. To make things worse for those most economically affected by the pandemic, the government support that have helped people survive is set to end around Christmas. There’s a possibility of a new stimulus from the Federal Government, but we are skeptical it can get done before Congress breaks for the holidays.
Yet, here we are, entering December after a November for the record books. The advances on a COVID-19 vaccine set off a rotation into stocks that would benefit the most from a return to economic growth. Compounding this was global central banks reiterating plans to keep monetary policy loose. As a result, all the stock market indexes we follow were up strong. The biggest winner were small cap stocks, which posted the best monthly gain on record for the asset class. Gold, in contrast, slipped more than it has in 4+ years.
Right now, we are very positive on the stock market. As we tell clients, you do well in the stock market when things go from bad to less bad to good. With the vaccine coming before Christmas, we feel that we are in the bad-to-less-bad phase. It is important to acknowledge that there are no guarantees. Our base-case scenario assumes there are no major hiccups to our thesis.
What could go wrong? There are three areas of concern that need watching into 2021. They are:
- Vaccine Trajectory: At the beginning of December this appears to be on track. With two vaccines appearing ready to get fast-track approval from the FDA, and production and distribution channels set in motion, we see this as a net positive. You can find out where you may be in line to get yours here.
- The “Real Economy” (small business and employment): Small businesses have been suffering and will likely continue to suffer until we are able to be back out and about again. The restaurant industry has been particularly hard hit, both from a profitability and employment standpoint. Blomberg reports more than 110,000 closings to date. And don’t let the reported unemployment numbers fool you, there are still 10.1 million jobs that haven’t been recovered and, according to S&P Market Intelligence, the “real” unemployment rate was closer to 9% at the end of October.
- Consumer Confidence: This is linked to how well #1 and #2 go. In November the consumer confidence index dropped from 101.4 to 96.1 – it was 132.6 in February. (source)
All of this, we should note, is to some extent dependent upon action by the Federal Government. Stimulus – money to keep the most affected individuals, businesses and State & Local Governments afloat – is a necessary element as the country manages through the new few months. Failure to inject new money into the economy, we believe, would result in a spike in business failures, personal bankruptcies, and much higher unemployment. This is the “real economy” that would take the hit. In such a scenario it’s hard to see how consumer confidence could stay high.
The effective distribution of the vaccine is vital to getting back to a more “normal” economy, whatever the next normal will look like. The logistics are complicated and rely on actors at all levels of government to coordinate their efforts. It also is reliant upon adequate vaccine production AND enough of the population getting the vaccine when they can.
The Stock Market is Good but the Dynamics Have Changed
Over the past decade asset allocation hasn’t worked as well as one would hope for a number of reasons. The major reason has been the dominance of one asset class – Large Cap Growth. More specifically, large cap technology stocks have dominated not just the outperformance of the NASDAQ index, but also the S&P500. As a result, an asset allocated portfolio, which we would argue is the correct investment strategy, lagged the benchmark index.
That, in our opinion, is changing. Moving forward we see a market dynamic that favors small & mid-sized companies over large company stocks. We see value as very undervalued relative to growth companies, starting to reverse the trend of underperformance. International equities have also started to reverse a long period of lagging US equities.
Chart #1 is a chart we showed you last month and we think is worthy of an update. It is a ratio chart of Large Cap Growth vs. Small Cap Value. Earlier this year the valuation spread between the two had reached peak levels not seen since early-2000 at the peak of the technology boom. The move off these extreme levels has begun.
Chart #2 shows the second trend we are seeing change. The Dollar has been quite strong since 2014. Typically, currencies trend for long periods so this comes to us as no surprise. That trend appears to be reversing, with then index breaking below 92. In the coming months we would expect it to move toward the 2018 lows. In the coming years we project the dollar weakening to the 80 level. Dollar weakness makes international investments more favorable for US-based investors. It also helps companies with international operations as overseas profits get converted back into a more favorable dollar.
Finally, we have a copper. The price of copper has been viewed as a leading indicator for the overall economic health of the global economy. So much so that “Doctor Copper” is the slang term used for the commodity that has a “PhD in economics.” Chart #3 illustrates the big move up over the prior 6 months.
Putting aside the commentary one can hear on a regular basis, what we are seeing is an underlying change in market dynamics that should be positive for investors. All in, after a dreadful 2020, Wells Fargo is expecting US. GDP to rebound 4.2% on the back of personal consumption increasing a forecasted 4.7%. Which is truly great.
A rebound of economic growth should be spread out across the economy as the country starts to normalize. This is positive for all sectors of the market, not just those that have done well during COVID.
Our Take: After a year of outsized gains for large technology companies the market is poised for more broad-based growth of the economy, thus the stock market can continue to trend higher as beaten down sectors rebound for a lost year of earnings.
Socially Responsible Investing – Yes You Can!!!
Responsible Investing (RI) has been a concept that has been talked about for years but has never been more than a niche area of the investment world, populated by just a few investment companies. Here at Magellan Financial we opened our first RI accounts 8 years ago for a limited number of interested clients. One of the biggest hurdles the RI investor has faced – the one keeping many from investing that mirrored their values – has been investment performance. Specifically, the question has always been, am I giving up returns for being socially responsible with my investments? The short answer is NO.
According to Nuveen’s Fifth Annual Responsible Investing Survey, RI has been on the rise as investors come to realize that one can achieve the same or better returns than they would with a non-RI portfolio. In part, this is a result of the economic benefits that companies have received from becoming more responsible. In part, the growing popularity of Responsible Investing has brought more investment choices from a variety of managers.
Magellan Financial has been investing in the Responsible Investing space for clients for more than 8 years now. If you are interested in learning more you can find our information here, contact us at 610-437-5650, or drop us an email at jon.soden@wfafinet.com.
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Jeffrey T. Bogert, Partner
Robert I Cahill, Partner Rob.Cahill@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com