Weekly Investment Newsletter (SITREP) – November 16, 2020

What a strange market environment we have seen since the election! Although many analysts were expecting an uncertain conclusion to the presidential election, very few expected global markets to go significantly higher on the news. The positive returns have been attributed to the expectation that there will be a “mixed Congress” – meaning that Democrats will control the House and Republicans are expected to retain the Senate (although that has yet to be finalized as well). Our top question, however, remains whether the market returns are due to the political issues or if investors are betting heavily on the continued economic and earnings rebound story.

 

Most of the major U.S. benchmarks added to last week’s sharp gains, bolstered by positive news of a coronavirus vaccine candidate from Pfizer.  All of the major indexes touched all-time intraday highs in early trading Monday but surrendered much of their gains by midweek.  The Dow Jones Industrial Average and the smaller cap benchmarks performed the best, while value shares easily outperformed their growth counterparts.  The Dow Jones Industrial Average added over 1,100 points finishing the week at 29,480, a gain of 4.1%.  The technology-heavy NASDAQ Composite retraced some of last week’s surge and was the only U.S. equity index to finish down for the week at ‑0.6%.  By market cap, the large cap S&P 500 added 2.2%, while the mid cap S&P 400 and small cap Russell 2000 added 4.3% and 6.1%, respectively.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 11/16/20

 

November has seen quite a reversal from the market returns we saw in September and October when markets generally traded lower. This is one of the best starts to November the markets have recorded with the broader indexes approaching all-time highs. We have also noticed a strong rotation away from the stocks that have performed the best since the recovery began in April. Underperforming sectors from earlier this year have reported the greatest returns in the last week as energy, financials and real estate all posted higher returns. The best performing areas of the market from 2020 have underperformed over the past week. It is difficult to discern if this change in trend will be able to continue or if it will reverse like earlier periods this year.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 11/16/20

 

Our market indicators are reflecting the recent strength in the broader markets. The long-term indicator has moved nominally from October’s closing values. The short-term indicator has risen the most showing 32 out of 36 sectors in strong demand mode. Recall that only 7 of 36 sectors were reflecting strength in late October. The last two weeks have seen a broad participation by many sectors and stocks in the rally, which is a good sign for future growth opportunities. Frankly, the rise has come so quickly that most sectors have become a bit overvalued in recent days.1  You can learn more about our market indicators by watching our monthly “Portfolio Construction” webinar (link here).

The long-term bull market for the S&P 500 remains intact despite the COVID recession earlier this year. Bespoke Investment Group often provides a smoothed representation of the market by viewing the 200-day moving average since the bull market began in 2009. It is worth noting that the sharp decline in the index from February/March shows as a small dimple in the big picture. Technical analysts would report this as a healthy chart showing renewed strength in the secular bull market. In the short-term the markets appear a bit overvalued as most sectors are trading at least two standard deviations above their 50-day moving averages.2 Historically, we expect to see the market trade sideways or lower in the next few days to correct for the recent euphoria.3

Source: Bespoke Investment Group, The Bespoke Report, 11/9/20

 

Apparently, the passing of the U.S. elections was enough to cheer up individual investors. The American Association of Individual Investors released their recent survey showing nearly 56% of investors consider themselves bullish in the future for U.S. stocks. The reading is the highest since January of 2018 and in the top 94% of all readings since the data began in 1987!4 As expected, the number of individual investors identifying themselves as bearish dropped below 25% for the first time since January of 2020. The data would reflect that strong bullish sentiment on the part of individuals does not necessarily correlate with higher stock returns in the coming months.5

Source: Bespoke Investment Group, The Bespoke Report, 11/13/20

 

U.S. corporate earnings season will finish this week with major retailers such as Wal Mart and Home Depot reporting results from the third quarter. U.S. companies have stunned analysts this month as nearly 80% of companies delivered earnings results above analyst expectations.6 The resiliency of U.S. companies to recover from the COVID recession has been impressive. Very few companies have reported earnings results below analyst expectations as well. Stock price trends after earnings results have been mixed as companies who reported earnings results before the election saw their stock price fall despite the better earnings. Companies who have reported earnings after the election have seen their stock price higher than average.7

Source: Factset Insight, John Butters, S&P 500 Earnings Season Update, 11/13/20

 

Inflation expectations have been a hot debate in the market recently. Many analysts believe the significant amount of fiscal and monetary stimulus will ultimately drive inflation expectations higher.8 The early results, however, have shown the opposite. The Consumer Price Index (CPI) is the generally accepted measure of inflation and the October release showed a muted increase of only 0.14%.9 Recall that CPI broadly measures price changes in energy, housing, food and wages. The drag on prices from energy and wages has been an anchor on the overall CPI calculation. The October report will serve as confirmation that price changes are weak and will be consistent with the Federal Board’s assessment to keep short-term interest rates lower for longer. The Fed also continues to call for more stimulus from Congress to aid in the COVID recovery.

Source: Bespoke Investment Group, The Bespoke Report, 11/13/20

 

U.S. interest rates remain at the higher end of recent trends. The 30-year Treasury closed last week at 1.65% moving higher on expectations of renewed economic growth due to the potential for a vaccine at year-end. Keep an eye on 10-year and 30-year U.S. Treasuries in coming months as the U.S. government will continue to auction more bonds to raise funds for the stimulus. Ideally, the addition of more bonds to the market could push interest rates higher in 2021.10 The Federal Reserve remains committed to letting the economy grow more aggressively before removing their accommodation. This could mean higher inflation would be acceptable to the Fed if unemployment remains above normal.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 11/16/20

 

The Federal Reserve’s policy for lower interest rates has echoed across all areas of the market including mortgage rates. The lower mortgage rates have spurred a surge in refinancing for the housing market. New home purchases remained strong over the summer but have waned in recent weeks. The national average for a 30-year fixed rate mortgage recently recorded a new low of 2.97%.11 While 30-year mortgage rates typically follow the 30-year U.S. Treasury Bond yield, recent increases in the Treasury yield have not caused mortgage rates to rise. The slowdown in home purchases is likely due to the approaching holiday season rather than any interest rate issues. Mortgage delinquencies have also recently declined as the economic recovery continues.12

Source: Bespoke Investment Group, The Bespoke Report, 11/13/20

 

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:

  1. Bespoke Investment Group, The Bespoke Report, 11/13/20
  2. Bespoke Investment Group, The Bespoke Report, 11/13/20
  3. Saut Strategy, Andrew Adams, Market Flash, 11/17/20
  4. Bespoke Investment Group, The Bespoke Report, 11/13/20
  5. Bespoke Investment Group, The Bespoke Report, 11/13/20
  6. Bespoke Investment Group, The Bespoke Report, 11/13/20
  7. Bespoke Investment Group, The Bespoke Report, 11/13/20
  8. P. Morgan Asset Management, Dr. David Kelly, Weekly Economic Update , 11/16/20
  9. Bespoke Investment Group, The Bespoke Report, 11/13/20
  10. Bespoke Investment Group, The Bespoke Report, 11/13/20
  11. Bespoke Investment Group, The Bespoke Report, 11/13/20
  12. Bespoke Investment Group, The Bespoke Report, 11/13/20
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