Market Strategy 11/16/2020

Key Takeaways

•  Further evidence of the appeal of riskier assets carried the S&P 500 and the Russell 2000 to new record highs last week.
• With interest rates low and rising prospects for the launch of an effective vaccine potentially by year-end, equity markets seem to be projecting a postCovid environment. This comes even as resurgences in the deadly virus raise concerns that drastic actions may be required for stemming its spread.
• Economic data and earnings results for Q3 released last week continue to evidence resilience of the US economy even in challenged circumstances.  

The age old axiom that “markets don’t like uncertainty” gained some further credence last week as a major US drug company announced progress on a vaccine that could possibly curb the spread of Covid-19. This news gave a boost to stock prices and to investor sentiment that favored riskier assets, adding further momentum to an ongoing rotation into small caps and other value-oriented segments of the stock market.

The Dow Jones Industrials and the S&P 500 respectively advanced 4.08% and 2.2% last week with the S&P500 closing at a new record high of 3585.15 last Friday. The Russell 2000 (small caps) index surged 6.08% last week and achieved its first new record high close since the end of August, 2018.

The tech laden NASDAQ (over 40% weighted in tech or tech related stocks) slipped 0.55% last week as investor appetite broadened toward value oriented stocks and small cap stocks stateside while some investors likely took profits in tech stocks in anticipation that capital gains taxes could rise sharply under the incoming Biden administration in 2021.

In the international realm where developed nation market indices are often heavily weighted toward value-oriented names, stocks got a boost as well as investors sought out cyclically sensitive stocks that could benefit from less risky economic reopenings supported by the availability of a vaccine or even several vaccines of sufficient efficacy to thwart the pandemic. Last week the Stoxx Euro 600 and the MSCI EAFE index (developed international equities ex-US and Canada) respectively rose 5.13% and 3.84%. The MSCI world market index that tracks developed markets (not emerging markets) also closed at a record high on Friday.

As we prepared to go to press with this publication stateside in New York on Sunday evening Asian stocks were moving higher and futures on stateside equity markets were indicating a higher opening in North America when markets open.

The boost to Asian stocks at their opening could be in part linked to an announcement of a trade agreement amongst China, Japan and South Korea, as well as nine other countries that was signed on Sunday and was touted in the press to be the world’s largest regional free-trade agreement. According to Bloomberg News the pact known as the Regional Comprehensive Economic Partnership (RCEP) covers a region comprised of a third of the world’s population and GDP.

The rise in equity futures tied to the US market was in part attributed to remarks made by two advisers to President-Elect Joe Biden who said that they were against a nationwide lockdown in the US notwithstanding the current resurgence of Covid-19 indicating that they favored targeted measures to specific resurgences rather than a broad or blunt response to resurgences of the pandemic virus.

In the week ahead investors will have plenty to ponder. We’d expect they are likely to continue to seek out segments of the equity market poised to benefit from a post-Covid environment; news on vaccines; political developments in Washington, D.C. in anticipation of a transition in administrations; economic data including releases scheduled this week on: retail sales industrial activity, housing, jobs and unemployment claims; as well as Q3 earnings season with some 10% of the S&P 500’s member companies still left to report results.

In our view the current rotation from some of the FAANG names and other companies tied to them is likely more attributable to profit-taking after a long profitable run ahead of the potential hike in capital gains taxes next year rather than concern that the momentum in technology is running out of steam longer term. From our perch on the Market Radar Screen information technology remains entrenched for now as the key driver along with globalization of regional growth trends across the developed, emerging and frontier markets. The ubiquitous nature of technology is embedded across broad segments of the world economy including business, the consumer and governmental entities.

All 11 sectors (the GICs) appear poised to continue to benefit from deployment of technology in the near, the intermediate and longer term whether it is to maintain a competitive edge, gain an advantage or simply maintain or create a value narrative worthy of investors’ interest, loyalty and investment.

Consumers’ relationship with technology appears likely to broaden further with the introduction of 5G connectivity, increased use of technology in the work place and home, and a virtuous upgrade cycle tied to a world of technology innovation that has progressed from hardware to software to subscription-ware making tech more accessible and affordable.

The recent increase in the 10-year Treasury yield appears to us as a mix of seasonal pricing, which tends to drive yields up towards the end of the calendar year, in addition to prospects for further weakening of the dollar as demand for US safe haven assets lessens as progress is made against Covid-19 and the green shoots of a sustainable economic recovery stateside appear poised to lead the globe into a broader economic recovery.