Top Weekly Themes
- Help is on the way. Some noteworthy developments on the fiscal stimulus front emerged last week. Most importantly, Speaker Pelosi seemed to soften on her position of a $2 trillion+ package by endorsing a roughly $1 trillion plan. Although complications remain, we think this increases the odds of a smaller relief package getting passed by year end. The package would include critical economic support such as vaccine funds, employment insurance, and rental eviction protection. We continue to think that additional fiscal stimulus is critical to the stock market’s ability to advance, as well as interest rates moving higher from current levels. We see continued evidence of a loss in economic momentum, with the U.S. labor market adding 245,000 jobs this past Friday, while expectations were for a 490,000 increase. This is a concerning trend that will likely continue without additional fiscal support. Should a bill pass in the near term, we believe it would serve as further support for the rotation away from large cap growth stocks.
- U.S. Dollar falls, breaking key support. Our long-held view of dollar weakness continues to materialize. Although our view is more nuanced, a global economic recovery, along with the removal of trade tariffs under a Biden presidency, should keep pressure on the greenback. Investors saw key support around 92 throughout this year, but the dollar has moved decisively below that level, to us signaling the potential for additional weakness. Implications of dollar weakness are numerous, but perhaps most noteworthy would be the tailwind it creates for emerging market equities. Emerging markets have piled on dollar denominated debt, so a weakening dollar relative to their local currencies makes that debt easier to service. Over the past 5 years, emerging market stocks have had a -0.62 correlation with the U.S. dollar.
- Too good to be true. For some time, we have voiced our skepticism about the valuation of certain high-flying “stay-at-home” stocks. At some point, valuations represent unrealistic optimism related to future revenue growth, user adoption, or earnings. The most recent example of this phenomenon is the now ubiquitous Zoom (ZM). Zoom’s stock was up over 600% heading into their most recent earnings report on November 30. Even though the company beat expectations by every metric imaginable, the stock fell 15%. For many stocks like Zoom, expectations are so high that results need to significantly outpace expectations. Generally, we think this will be a challenge for many stocks like Zoom as investors begin to pivot towards exposures that will benefit from a more sustained economic recovery.
Returns Table
| Equities | Week (%) | YTD (%) | 1-Year (%) | 3-Year (%) | 5-Year (%) | Div Yield (%) |
|---|---|---|---|---|---|---|
| S&P 500 | 1.1 | 15.5 | 20.8 | 47.1 | 97.8 | 1.57 |
| Russell 1000 Value | 0.5 | 0.7 | 4.9 | 18.6 | 55.2 | 2.29 |
| Russell 1000 Growth | 1.7 | 33.5 | 39.8 | 81.5 | 149.6 | 0.75 |
| Russell 2000 | 0.2 | 12.2 | 17.0 | 25.4 | 69.4 | 1.33 |
| MSCI EAFE | 1.5 | 5.6 | 10.0 | 15.0 | 41.2 | 2.42* |
| MSCI EM (Emerging Markets) | 1.7 | 13.7 | 22.5 | 20.6 | 73.2 | 2.14* |
| Fixed Income | Week | YTD | 1-Year | 3-Year | 5-Year | Yield |
| Bloomberg Barclays US Aggregate | 0.0 | 7.1 | 6.7 | 16.7 | 24.0 | 1.18 |
| Bloomberg Barclays US High Yield – Corporate | 0.7 | 5.7 | 8.0 | 18.7 | 45.3 | 4.45 |
| Bloomberg Barclays Municipal Bond | 0.2 | 4.6 | 4.9 | 14.8 | 21.3 | 1.17 |
| Bloomberg Barclays Global Aggregate x US (Country) | 1.2 | 8.6 | 9.3 | 13.2 | 26.5 | 0.72 |
| Commodities | Week | YTD | 1-Year | 3-Year | 5-Year | Current Level |
| Crude Oil WTI (NYM $/bbl) Continuous | (0.2) | (25.3) | (18.6) | (21.8) | 11.1 | 45.6 |
| Natural Gas (NYM $/mmbtu) Continuous | (15.3) | 14.5 | 2.7 | (18.1) | 14.9 | 2.5 |
| Gold NYMEX Near Term ($/ozt) | 1.7 | 20.9 | 24.3 | 43.6 | 73.0 | 1,836.8 |
| Copper Cash Official LME ($/mt) | 6.1 | 24.7 | 32.1 | 14.0 | 69.7 | 7,679.0 |
| Currencies | 1 Week Ago | YTD | 1-Year Ago | 3-Years Ago | 5-Years Ago | Current Level |
| U.S. Dollar per Euro | 1.19 | 1.12 | 1.11 | 1.19 | 1.09 | 1.22 |
| Japanese Yen per U.S. Dollar | 104.28 | 108.68 | 108.55 | 112.80 | 123.18 | 103.77 |
| U.S. Dollar per British Pounds | 1.33 | 1.32 | 1.30 | 1.35 | 1.50 | 1.35 |
As of December 3, 2020 (close) *Dividend Yield For MSCI EAFE and MSCI EM are from 11/30/2020.
Chart of the Week
Key Takeaways
- Perhaps not surprisingly real-time economic data is starting to show the impact of increasing virus cases and a reinstitution of certain business restrictions.
- Although these trends are likely to reverse as we get through the winter months (and closer to vaccine distribution), the economy will still need help bridging the gap.
- As discussed above, policy makers appear to be considering a new fiscal stimulus compromise, which may mean something gets done more quickly than we anticipated.
- In our view this would be supportive of stocks, specifically the more cyclical areas of the market that have been laggards in 2020 – value, small cap, and international stocks, as examples.
- We continue to believe that positive vaccine developments make additional fiscal stimulus more likely, as policy makers would be building a clearer bridge between now and a time in the future when economic activity could return to normal. Investors are seeing this play out as negotiations on a new bill progress.
Commentary
The spread between the 10-year U.S. Treasury yield and the S&P 500 dividend yield remains near historic lows. Currently, 63% of stocks in the S&P 500 yield more than the 10-year Treasury yield. For context, the average percentage since 1990 has been about 18%. Although interest rates are likely to increase some in 2021 as growth and inflation expectations move higher, rates will remain low relative to stock market yields. In our view, this will continue to push investors into stocks as they look for income (and overall return) wherever they can find it.
