Weekly Investment Newsletter (SITREP) – December 7, 2020

U.S. stocks reached further into record territory with all the major benchmarks touching new intraday highs by Friday.  The Dow Jones Industrial Average cleared 30,000 points ending the week at 30,218, up 1.0%.  The technology-heavy NASDAQ Composite had its third consecutive week of gains adding 2.1%.  By market cap, the large cap S&P 500 gained 1.7%, while the mid cap S&P 400 and small cap Russell 2000 rose 1.8% and 2.0%, respectively.

 

International markets were mostly positive for the week.  Canada’s TSX rose for a fourth consecutive week adding 0.7%, while across the Atlantic the United Kingdom’s FTSE 100 rallied 2.9%.  On Europe’s mainland, France’s CAC 40 gained 0.2%, but Germany’s DAX retreated -0.3%.  In Asia, China’s Shanghai Composite and Japan’s Nikkei rose 1.1% and 0.4%, respectively.  As grouped by Morgan Stanley Capital International, developed markets added 1.2% while emerging markets rose 1.6%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 12/7/20

 

November trends carried over well into December last week with the energy, health care and financials driving returns for stocks. Even a bad asset allocation model looks good after the last four weeks. The mean reversion trade (worst performing investments this year doing the best recently) continues to bring assets that were down big in March to positive returns year-to-date. The three value categories have all returned to positive returns for the year while large- and mid-growth remain above 30% returns. We continue to reiterate that asset allocation has been very important in 2020 as a means of avoiding those asset classes that were down the most in March.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 12/7/20

 

Our market indicators have risen to some of their highest levels since February 2020. The long-term indicator remains strong. The short-term indicator has held steady at 32/36 reflecting broad market strength. Thirty-two sectors (out of thirty-six total) are showing strengthening demand and lower risks. We also recognize that a market with greater than thirty sectors in demand often represents lofty valuations, which would cause us to be cautious when adding new money to the markets. You can learn more about our market indicators by watching our monthly “Portfolio Construction” webinar (link here).

Most of the major indexes for U.S. stocks are up 2% or better in the first week of the month. The post-election surge has helped several asset classes recover earlier losses, especially the energy and financial sectors. Our most recent research on asset classes and sectors shows rising strength in many areas that have been weak for several months. One defining characteristic of the November rally was the broadening support behind small companies and value stocks. The result has seen several asset classes surge ahead of the Russell 3000 Index over the last four weeks.

Market valuations remain elevated with current index prices well above their 50-day moving averages. Bespoke Investment Group recently pointed to long-term studies that overvalued markets do not always immediately reverse. Higher valuations tend to act as fuel when markets do turn down, however the downturn is usually a result of a specific catalyst other than the valuations themselves. Recently, all 24 of the S&P 500 Industry Groups have returned to prices above their 200-day moving average. The last time we saw such a high reading was on the first trading day of 2020. Recall that we saw 100% of industry groups BELOW their 200-day moving average back in April 2020.1

Source: Bespoke Investment Group, Bespoke Morning Lineup, 12/5/20

 

We are encouraged by the recent market strength since it has come with renewed strength in sectors OTHER THAN technology. There were many concerns this summer as the technology sector became a larger part of the index.  Many investors felt the heavy concentration of technology stocks driving performance was dangerous. The S&P 500 Index has recently traded to new highs while the technology sector remains nearly 1% from its recent highs. The last time the S&P 500 Index hit new highs without the technology sector at new highs was in July of 2016.2

Source: Bespoke Investment Group, Chart of the Day, 12/7/20

 

No sector has been hit harder during the economic shutdowns than the energy sector. Demand for oil and gas products has fallen dramatically since January 2020 creating a number of problems for energy companies. For the record, pricing in the energy sector had already been weakening due to increased supply of products prior to 2020. News of a potential vaccine has led investors back to energy stocks as the sector is now up more than 10% in December and more than 45% since the low in October.3 Unfortunately, the sector remains down more than 25% for the year. The 2021 outlook will depend heavily on recovering economies and renewed interest in travel abilities.

Source: Bespoke Investment Group, The Bespoke Report, 12/4/20

 

U.S. interest rates took another turn higher last week with the 10-year U.S. Treasury bond approaching the psychologically important 1% level. Rates surged on news that Congress is working on a fiscal stimulus package that would increase government spending and require additional debt issuance.4 Despite the higher debt levels, U.S. bonds remain attractive to investors relative to foreign bonds with negative interest rates. Rising interest rates have helped the financial sector as bank stocks lifted on hopes of improving margins. Investors continue to watch if higher rates will be reflective of rising inflation in 2021.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 12/7/20

 

The S&P 500 Index just posted its best November since 1928 with a return of 10.75%.5 Does that mean that December will be more difficult for investors after such a hefty return? Historically, November and December are good months for stock investors. The Dow Jones Industrial Average has shown positive returns 73% of the time with an average return of 1.43%.6 Interestingly, the returns in December typically start a bit shaky for the first few weeks but turn notably better in the last half of the month. Lower average returns over the last ten years were due to the challenging year in 2018 where December returns were rocked by an unexpected Fed rate hike. We feel comfortable predicting the Fed will not look for a repeat performance in 2020!

Source: Bespoke Investment Group, Bespoke Morning Lineup, 12/1/20

 

If you would like to schedule time to discuss your portfolio or the markets in detail, please call our office at (281)616-5935 or send an email to cameron.malott@engravewealth.com. We are continually grateful for the confidence you have placed in our team. We look forward to serving your family in the years to come!

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker


FOOTNOTES AND DISCLAIMERS:

  1. Bespoke Investment Group, The Bespoke Report, 12/4/20
  2. Bespoke Investment Group, The Bespoke Report, 12/4/20
  3. Bespoke Investment Group, The Bespoke Report, 12/4/20
  4. Bespoke Investment Group, The Bespoke Report, 12/4/20
  5. Bespoke Investment Group, The Bespoke Report, 12/4/20
  6. Bespoke Investment Group, The Bespoke Report, 12/4/20
Equity Price Levels and Returns: All returns represent total return for stated period. Index: S&P 500; provided by: Standard & Poor’s. Index: Dow Jones Industrial 30 (The Dow Jones is a price-weighted index composing of 30 widelytraded blue chip stocks.) ; provided by: S&P Dow Jones Indices LLC. Index: Russell 2000; provided by: Russell Investments. Index: Russell 1000 Growth; provided by: Russell Investments. Index: Russell 1000 Value; provided by: Russell Investments. Index: MSCI – EAFE; provided by: MSCI – gross official pricing. Index: MSCI – EM; provided by: MSCI – gross official pricing. Index: Nasdaq Composite; provided by: NASDAQ OMX Group.
MSCI EAFE is a Morgan Stanley Capital International Index that is designed to measure the performance of the developed stock markets of Europe, Australasia, and the Far East.
Key Interest Rates: 2 Year Treasury, FactSet; 10 Year Treasury, FactSet; 30 Year Treasury, FactSet; 10 Year German Bund, FactSet. 3 Month LIBOR, British Bankers’ Association; 3 Month EURIBOR, European Banking Federation; 6 Month CD, Federal Reserve; 30 Year Mortgage, Mortgage Bankers Association (MBA); Prime Rate: Federal Reserve.
Sector Returns: Sectors are based on the GICS methodology. Return data are calculated by FactSet using constituents and weights as provided by Standard & Poor’s. Returns are cumulative total return for stated period, including reinvestment of dividends. Style Returns: Style box returns based on Russell Indexes with the exception of the Large-Cap Blend box, which reflects the S&P 500 Index. All values are cumulative total return for stated period including the reinvestment of dividends. The Index used from L to R, top to bottom are: Russell 1000 Value Index (Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values), S&P 500 Index (Index represents the 500 Large Cap portion of the stock market, and is comprised of 500 stocks as selected by the S&P Index Committee), Russell 1000 Growth Index (Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values), Russell Mid Cap Value Index (Measures the performance of those Russell Mid Cap companies with lower price-to-book ratios and lower forecasted growth values), Russell Mid Cap Index (The Russell Midcap Index includes the smallest 800 securities in the Russell 1000), Russell Mid Cap Growth Index (Measures the performance of those Russell Mid Cap companies with higher price-to-book ratios and higher forecasted growth values), Russell 2000 Value Index (Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values), Russell 2000 Index (The Russell 2000 includes the smallest 2000 securities in the Russell 3000), Russell 2000 Growth Index (Measures the performance of those Russell 2000 companies with higher priceto-book ratios and higher forecasted growth values).
Past performance does not guarantee future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss.
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