What Did We See?
- U.S. Large Cap stocks, or the S&P 500 index, were up about 11% in August
- The developed markets of Japan was up more than 11%.
- Europe and the U.K. were up from about 14% to 12%.
- Emerging Markets were up more than 9% and Asia (Ex-Japan) were up about 8%
- Global fixed income returns were all positive with high yield bonds leading.
Where Do We Stand?
- The market overcame several hurdles during the month that led to a record setting rally.
- Valuations remain extremely stretched while the prospect for volatility, while now diminished, remains.
- I have selectively put some cash to work but remain in a position to take advantage of opportunities.
- I continue to rebalance your accounts accordingly.
The US equity market posted one of the best ever November returns driven by positive news on vaccines and a relatively smooth US election cycle. Some may say this month was a turning point in this crisis. The US election enacted with no violence or major stumbles was a hurdle we needed to overcome. And we did. The announcement that three vaccines were found to be highly effective against the virus added fuel to the post election rally. While the rally has been nice, the path to recovery will remain bumpy. The virus is still not contained and governments around the world are still being forced to restrict economic growth.
The economic effect of this most recent surge in infections won’t be realized for several weeks. Yet, if Europe is a bellwether for the US one can expect another significant decline in activity through the winter. On the positive, we are better prepared for this surge and markets will likely view any developments through the prism of vaccines being available by early 2021. That will likely mitigate any major damage to markets, although volatility could certainly be in the cards.
A Vote For Stability
In the US election the overwhelming vote went for stability. After four years of confrontational policies and unpredictable news cycles, the majority of Americans had had enough. Joe Biden has been elected President. One would expect a President Biden to be much more diplomatic in his approach than his predecessor. This means a high likelihood of less tariff wars and more reuniting with global peers to combat things like terrorism, climate change and others. Whether you are jubilant or disappointed, a large unknown has been erased. That is always good for markets.
Divided we Stand
In other elections, the Democrats retained control of the House albeit by a slimmer margin. Control of the Senate is still up for grabs due to the two runoff elections happening in January in Georgia. If the Republicans win one of those elections (a likely outcome) the Senate will remain in Republican hands. This scenario has us in a divided government which means lower stimulus measures being passed. However, it would also result in less of a chance for corporate tax rate increases. Overall, a divided government scenario would be positive for the markets. Add in the positive vaccine news and generally lower uncertainty coming and hence, the rally we saw in November.
Vaccination Station
In the race to find a vaccine for Covid-19, three competitors have emerged. Pfizer/BioNTech, Moderna and AstraZeneca/Oxford have all produced vaccines with strong effectiveness against the virus. While Pfizer (90% effective) and Moderna (95%) seem to be the front runners, the AstraZeneca (70% effective) vaccine is able to be stored at regular refrigerator temperatures and costs a fraction of the other two. This makes the AstraZeneca vaccine uniquely formulated for the emerging markets, where cold storage distribution is a challenge. The question that remains now is how quickly we can approve, manufacture and distribute these vaccines on a global scale. This will take some time and the virus will not wait for us. We shall be mired in a “stay at home” kind of world until the vaccines are distributed and effective.
Around the World
In Europe the virus surge has wreaked havoc on their recovery. Common measures of services activity have fallen well below growth levels while consumer confidence has also declined. It is highly likely the 4th quarter there will show negative growth. The UK has also faltered but their government has done a good job of extending the furlough scheme (unlike the US!) and increasing their asset purchases.
Asia and Emerging Markets economies have fared much better than their developed counterparts. Many of these countries have benefitted by either being early on the virus timeline or having the foresight to impose strict lockdowns.
A Timeline to Change
The global recovery is likely to continue although a slowdown is certainly in the cards for right now. The economic cycle we experienced in the US before this pandemic hit was a long one. In fact, it was about 130 months long. The average expansion since 1945 has been 59 months. The first quarter of 2021 is likely to be full of fits and starts. The distribution of a vaccine will take some time to show up in the economy. We need time for the new administration to get their footing and implement strategy. We need time for families to feel comfortable enough to travel and spend money. Expect this to last through the first quarter.
The second quarter will be a different story. At it’s peak (2nd quarter 2018), the most growth we got in the last expansion was a little over 3%. Some are expecting growth in the 6% range for the second quarter. That is twice the level at the peak of the last cycle. Granted, these are numbers coming off of a significant decline in GDP. However, they do support the case that markets do not have to collapse to reflect economic reality.
The point is, the likelihood of economic activity NOT accelerating in March, April and May is rather low. That is why we remain invested but have cash to spend if opportunities present themselves between now and then.
What a year!
I thank you for remaining a patron of my musings during a most trying year. I am optimistically planning for 2021 and beyond and have enjoyed having you on the journey.
Shorepine Wealth Management achieved a long term goal in number of clients serviced during the month of November! I remain honored and humbled by those that have given me the opportunity to assist you in your financial journeys.
If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.
We appreciate you being a part of the Shorepine Wealth Management family!
Investment Products are Not FDIC Insured. No Bank Guarantee. May Lose Value. Investing involves risk. All written content on this website is for information purposes only. Opinions expressed herein are solely those of Shorepine Wealth Management, unless otherwise specifically cited. This is neither a solicitation of offers to buy securities nor an offer to sell securities. Past performance is no guarantee of future results. Material shown here is believed to be from reliable sources however, no representations are made by our firm as to another parties’ accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Shorepine Wealth Management, LLC is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where registered or exempted.
