Top Weekly Themes
- Despite last week’s snowstorm, the sun usually shines on investors in December – According to analysis from Dorsey, Wright & Associates, over the past 62 years, the S&P 500 has generated positive returns during the month of December just under 75% of the time, the best hit rate for any single month. Given the big move (S&P 500 +10.9%) experienced within the market last month, one might wonder if such a large advance has historically had a negative impact on the expected outcome for December. Said another way, do strong November returns sap the market’s strength in the following month? Looking at the same 62-year time period, when November has produced a return greater than 5%, the win rate for December declines, but only slightly so, to 67%. Putting a finer point on the month itself, and looking all the way back to 1928, it is easy to see why investors look forward to a Santa Claus Rally. Over that extended time period, the return for the first half of the month averages just 0.05%, while the second half of December averages 2.43%. A nice present from old Saint Nick, indeed.
- And then there were two – Earlier this month, the FDA, under an Emergency Use Authorization (EUA), approved the use of the Pfizer vaccine for COVID-19. Late last week, an FDA advisory panel voted in favor of a second vaccine, this one produced by Moderna. This vaccine employs the same messenger RNA (mRNA) technology utilized by the Pfizer therapeutic. With vaccinations using Pfizer’s treatment already started, the impediment to a return to normalcy comes from their limited availability. With a second entrant now poised to be approved for use, availability should begin to improve. On that score, in an interview last week, Dr. Fauci indicated that depending on the “efficiency of the rollout,” vaccines should be widely available within the United States to a healthy person with no underlying health conditions “sometime by the end of March, the beginning of April.” If true, this would roughly align with the one-year anniversary of the widespread lockdowns which took place throughout much of the country. Stating the obvious, within the financial markets, the economy, and society in general, it certainly feels much, much longer.
- Largely Status Quo at the Fed – The Federal Open Market Committee (FOMC) concluded their final meeting of 2020 last Wednesday afternoon. To nobody’s surprise, the Federal Funds rate guidance was unchanged at 0.0% to 0.25%. The Fed had previously projected that this rate would stay at these levels until at least the end of 2023, and that posture was again reiterated at this meeting. As to Quantitative Easing (QE), since June, the Fed has been purchasing $80 billion of Treasury securities and $40 billion in agency mortgage-backed bonds each month. They had previously indicated that they would maintain that pace for the “coming months.” The policy statement released at the conclusion of the meeting on Wednesday states that the central bank will continue to make purchases at those levels “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” While the Fed has done much to support the U.S. economy since the onset of the pandemic, in the post meeting conference, Fed Chairman Jerome Powell stressed the need for another response from lawmakers, saying: “The case for fiscal policy right now is very, very strong and I think that is widely understood.” He went on to say, “now that we can kind of see the light at the end of the tunnel, it would be bad to see people losing their business” due to the fact that they could not hold on for a few more months.
|Equities||Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||0.5||2.0||2.9||19.0||58.7||2.26|
|Russell 1000 Growth||2.8||37.2||39.4||83.7||157.0||0.74|
|MSCI EM (Emerging Markets)||1.5||16.8||18.4||23.7||82.5||2.14*|
|Bloomberg Barclays US Aggregate||0.0||7.2||7.3||16.4||23.7||1.16|
|Bloomberg Barclays US High Yield – Corporate||0.43||6.4||6.9||19.4||50.5||4.41|
|Bloomberg Barclays Municipal Bond||0.2||5.1||5.1||14.5||21.1||1.09|
|Bloomberg Barclays Global Aggregate x US (Country)||0.8||9.6||10.1||14.7||28.0||0.70|
|Crude Oil WTI (NYM $/bbl) Continuous||3.4||(20.8)||(20.6)||(15.6)||38.4||48.4|
|Natural Gas (NYM $/mmbtu) Continuous||3.3||20.4||13.7||0.9||50.2||2.6|
|Gold NYMEX Near Term ($/ozt)||2.9||24.2||28.0||50.5||79.6||1,887.2|
|Copper Cash Official LME ($/mt)||2.3||28.2||27.8||17.2||73.5||7,893.0|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.21||1.12||1.12||1.18||1.08||1.22|
|Japanese Yen per U.S. Dollar||104.41||108.68||109.53||112.66||122.68||103.04|
|U.S. Dollar per British Pounds||1.33||1.32||1.31||1.33||1.49||1.36|
Chart of the Week
More Stimulus on the Way?
- While details of the stimulus were still being negotiated late last week, the table above shows some of the recent proposals by the various factions. Few would argue that, with wide distribution of the vaccine now just a few months away, this legislation is not needed to build a bridge for the economy.
- There is growing optimism that the legislation will pass, with Senate Majority Leader Mitch McConnell stressing that Congress would not leave town for the holidays until a stimulus deal is passed.
- On the consumer front, the package under discussion includes $300 a week in enhanced unemployment insurance for an added 16 weeks, direct checks to households, and an extension of forbearance for student loans.
- Assistance for businesses would likely include something in the area of $300 billion of Paycheck Protection Program (PPP) monies, along with assistance directed toward airlines, airports, and other transportation related entities.
- While skepticism regarding the passage of pending legislation is always warranted, we believe a stimulus will be passed prior to year-end and that it will help provide the needed bridge for the economy until a vaccine is widely available.
Russell 2000 quarterly returns land on the Top 10 for a second time in 2020
While the year is not yet over, barring an extreme selloff over the next eight trading days, the fourth-quarter performance by the small cap Russell 2000 Index will easily land it in the top 10 since the inception of the Index in the late 1970s. If that proves to be the case, it will be the second such quarterly result for calendar 2020.
As the data in the table above displays, returns over the ensuing quarters, particularly looking out two quarters, have been robust, with an average increase of 14.5%. Further, returns have been positive just under 78% of the time.
Still, given the huge surge in Russell Index, it is now substantially overbought, trading 33% above its 200-day moving average. This type of an extreme has only been seen twice over the past 40 years, in 1983 and then in 1999.
While the current overbought condition arguably creates a near term risk or headwind for small cap stocks, when momentum has been this strong in the past, returns over the next twelve months have been positive more than 70% of the time, albeit with an average return (+7.4%) that has been more muted than what is listed in the table above.
Looking at the Russell 2000 through the lens of these two historical metrics, would lead to the conclusion that in spite of their recent surge, small cap U.S. equities will likely continue to move higher in 2021.