Weekly Investment Newsletter (SITREP) – November 30, 2020

Most of the major U.S. benchmarks reached new record highs last week on optimism for a coronavirus vaccine and diminishing political uncertainty surrounding the presidential election.  The Dow Jones Industrial Average briefly crossed the 30,000-level before ending the week at 29,910 – nonetheless, a gain of 2.2%.  The technology-heavy Nasdaq Composite finished the week up 3.0%.  By market cap, the large cap S&P 500 added 2.3%, while the mid cap S&P 400 and small cap Russell 2000 rose 2.7% and 3.9%, respectively.

 

International markets also marched higher with almost all tacking on a fourth consecutive week of gains.  Canada’s TSX rose 2.2% and the United Kingdom’s FTSE 100 added 0.3%.  On Europe’s mainland, France’s CAC 40 and Germany’s DAX rose 1.9% and 1.5%, respectively.  In Asia, China’s Shanghai Composite finished the week up 0.9%, while Japan’s Nikkei surged 4.4%.  As grouped by Morgan Stanley Capital International, developed markets rose 1.9% and emerging markets finished up 2.0%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 11/30/20

 

November has been a strong month for stocks historically and this was one for the record books. Nearly every major stock index in the U.S. is trading at or near record highs. This This November was one of the strongest on record for stock performance for the S&P 500 Index.1 All stock sectors saw price increases this month, especially those that had been beaten down the most since March. The returns in November helped curb losses from earlier in the year for energy, financials, and industrials while technology and consumer discretionary continued their winning ways. The growth categories continue to dominate year-to-date returns while the value categories shed most of their losses for the year.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 11/30/20

 

Our market indicators continue to reflect strength across all time frames. Our long-term indicator has risen to its highest value since the March correction. Despite most major indexes being above the February highs, our indicator values are just now approaching pre-COVID levels. We believe this reflects the quality of the recent recovery in stocks. The short-term indicator confirms that indexes are a bit stretched in valuations currently. We remain cautious with new investments until the moving averages can catch up with current prices making valuations more reasonable. You can learn more about our market indicators by watching our monthly “Portfolio Construction” webinar (link here).

It is difficult to explain why stocks had such a good month in November. Most investors saw the uncertainty surrounding the U.S. elections as troubling in October and stock prices fell as a result. The theory was that an undecided election would not solve those concerns and stocks could remain volatile. Many investor sentiment measures remained weak in November as we await the electoral college vote on December 14th to determine the final position of electors. A close analysis of markets shows strong returns in the first ten days of November followed by little movement in the last three weeks.2 We also note strong capital flows from foreign investors in U.S. markets helping drive domestic returns as concerns over European growth continue.3


Source: Bespoke Investment Group, Bespoke’s Morning Lineup, 11/30/20

 

We hate to play the party pooper finding fault with a great market environment, however the recent runup in stock prices has left most indexes overvalued on a short-term basis. We often look at index values relative to their 50-day moving average. Bespoke Investment Group notes that the S&P 500 Index is currently trading more than one standard deviation above its 50-day moving average and more than 60% of stocks in the index are more than one standard deviation above their 50-day moving average.3 Historically, indexes and stocks trading at that level tend to move see prices get closer to their 50-day moving average in one of two ways; either the stock price stays steady while the moving average catches up or the price moves lower toward the moving average.

 

Source: Bespoke Investment Group, Bespoke’s Morning Lineup, 11/30/20

 

As expected, when stock prices move consistently higher, the volatility measures tend to move lower. The CBOE Volatility Index is the most common index used to measure relative volatility and it recently hit the lowest levels since the COVID crisis began. After spiking twice in September and October, the index has steadily drifted lower and closed below 20 for the first time since February 2020.4 Investor sentiment remains subdued despite the lower volatility and higher market prices.

Source: Bespoke Investment Group, Charts We’re Watching, 11/27/20

 

The value of the U.S. dollar has fallen consistently against foreign currencies since the end of March. During height of the pandemic, the dollar rose dramatically as fear peaked and investors ran to the safety of the U.S. dollar. As the Federal Reserve announced stimulus measures in April, the dollar began to retreat to normal levels. In addition to the traditional money supply growth and bond-buying programs, the Fed has embarked on additional means of keeping the dollar from rising.5 The lower dollar helps make foreign investments more attractive to U.S. investors and has been highly correlated to the rising prices of investments in non-U.S. investments.

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

 

U.S. interest rates have held steady over the last month after moving higher in September/October. Expectations from analysts continue to warn of higher long-term rates in 2021 due to the potential for economic growth. As the U.S. Treasury continues to offer additional long-term bonds to pay for the stimulus, which should also put upward pressure on interest rates. The impact on investment portfolios should be the potential for lower prices on existing bonds due to higher rates on future bonds. Now is the time to protect principal in a bond portfolio.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 11/30/20

 

The impact of economic shutdowns earlier in the year are still reflected in gasoline prices. The lack of demand from travelers combined with excess supply of petroleum products has created a falling gas price across the country. The holidays would normally see an uptick in travel, however the government restrictions on gatherings has further pushed demand down for gasoline. Experts predicted 45% fewer travelers on the road for Thanksgiving with similar effects on Christmas travels.6

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

 

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, 11/20/20
  2. Bespoke Investment Group, The Bespoke Report, 11/20/20
  3. Saut Strategy, Andrew Adams, Market Flash, 12/2/20
  4. Bespoke Investment Group, The Bespoke Report, 11/20/20
  5. Bespoke Investment Group, The Bespoke Report, 11/20/20
  6. Bespoke Investment Group, The Bespoke Report, 11/20/20
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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