Market Strategy 11/23/2020

Key Takeaways

• We discuss a question we hear often from both private and institutional investors as the market has rallied this month.
• A broadening of investor appetite for equities in the US and abroad has become more pronounced this November than in prior months.
• With 92% of companies in the S&P 500 having reported Q3 results earnings and revenue expectations have been broadly exceeded.
• Economic data last week continued to show resilience even as the gridlock in Washington and resurgence in Covid-19 cloud the outlook for further growth near term.   

A holiday abridged week in the US that flows into Thanksgiving Day on Thursday and Black Friday at the end of the week will provide just three and a half days of trading stateside for investors to reflect on what they have to be grateful for and what they have to worry about from a market perspective.

Our view from our perch on the market radar screen is that it looks as if investors who sidelined trillions of dollars of cash—not only since the emergence of the Covid-19 crisis but since the Great Financial Crisis of 2007-2008—have tired of watching their sidelined investible cash wither in bank deposits and money markets that proffer low returns even against near record low inflation deciding to take action to add to positions in equities not only in the US but around the world.

The question we often hear from folks these days is “is it too late to get in?” Our answer depends on who asks the question, their investment experience, tolerance for risk, their goals and objectives, and their potential need for cash. Then we’ll give them our point of view as strategists who consider on a near term as well as intermediate and longer term the risks and opportunities that might lie ahead. Lastly, we’ll recommend that they consider our views in consultation with their financial advisors or their investment management committee.

From our perspective today and looking down from the proverbial “10,000 foot level” it would seem that Covid-19 has disrupted enough economic growth and progress in 2020 to position the US economy toward an economic recovery and thereafter a sustainable economic expansion that could well ignite a global economic boom that will cause even the darkest of skeptics to take notice.

With the herculean efforts of the Federal Reserve (not-withstanding the apparent differing views of the Treasury Secretary and the Fed Chairman last week); the fiscal stimulus and rescue packages deployed earlier by the administration and both Houses of Congress earlier this year as a good (if imperfect ) “down payment” toward an eventual economic recovery once Covid-19’s spread is stemmed and with inflation likely contained not only by central bank monetary policies but by counter inflationary trends driven by technology and globalization—the future looks bright so long as investors practice patience.

Trees and stock prices don’t grow to the sky even if sometimes they look headed in that direction. It’s important for investors to right size expectations, know what they own, why they own it, and have reasonable expectations of what to expect from the components in their portfolio as they navigate the distance from goals and objectives desired to the end of their investment time line objective whenever and whatever that might be.

The current bull market that emerged from the low on March 23 of this year appears so far to be much like its predecessor (the bull market that ran from March 9, 2009 to February 19 of this year)— sensitive to catalysts that can emerge from a number of sources (including economic data, corporate news, monetary policy and even political wrangling and fiscal policy) that can trigger an opportunity for short-term traders, nervous investors and skeptics to take profits without the day-to-day “FOMO” (fear of missing out) that can grip the markets and grab headlines midst a bull run.

A well-known hurdle for the markets to clear that lies ahead are the two run-off elections in Georgia scheduled to occur on January 5, 2021 for two seats in the Senate. The market appears to expect the Republicans will maintain their control of the Senate providing checks and balances on important decisions. Other hurdles to clear include progress in gaining approval for the vaccines that offer promise to stem the spread of Covid-19 as well as the deployment and acceptance of the vaccines when they are made available.

The current “bull run” shows increased interest by investors seeking greater diversification moving a market that has been driven by growth stocks over recent years to a market likely driven not only by growth but by value segments of the markets as well. There’s also been increased appeal for dividend paying stocks that can provide current income with the potential for capital gains should stocks appreciate. These as well as greater interest in international diversification are positive developments in our view for the markets and investors.

Alongside the positive developments are pockets of speculation midst some IPOs as well as segments of the market where valuations look exceptionally stretched. From our perspective the froth in these segments is not pervasive but rather contained within the respective segments that tend to breed pie in the sky expectations, animal spirits, and irrational exuberance.