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BMT Monday Market Insights – November 16, 2020

Market Insights

Top Weekly Themes

  1. Not quite 98%, but pretty close: Earlier this year, when commenting about the effectiveness of a potential COVID-19 vaccine, Dr. Anthony Fauci said, “We don’t know if it’s going to be 50% or 60%. Hopefully, I’d like to see 75% or more, but the chances of it being 98% effective is not great.” Last Monday (November 9)  Pfizer announced interim results of its vaccine trial showing that it was 90% effective in preventing COVID-19. The company went on to say that they plan on submitting the vaccine to the FDA for Emergency Use Authorization after the required safety milestone is achieved, which is currently expected this week. From an availability standpoint, Pfizer said that they could have 50 million doses by year-end, with 1.3 billion doses available in 2021. Dr. Fauci called the results of the trial “extraordinary” and said this was “really a big deal.” Investors agreed, as the market added to the prior week’s huge gains with the Dow closing out the day higher by over 834 points, or just under 3%.
  2. Bonds routed on Pfizer news: The Pfizer news had the opposite effect on bonds, which had benefitted from the economic challenges inflicted by the virus and a very accommodative Federal Reserve. With an effective vaccine likely on the horizon, far brighter days for the U.S. economy are likely to unfold over the coming months. This had investors fleeing the safety of Treasuries, with the damage being particularly acute at the intermediate and long end of the curve. The 10-year Treasury, which ended the prior week with a yield of 0.83%, tacked on 13 basis points (0.13%), to close out last Monday’s trading at 0.96%. That moved the yield to a seven-month high, and within a whisker of the psychological barrier of 1.0%. With more government stimulus likely, and an improving economy now in the offing, a continued (modest) rise in longer-term interest rates seems likely over the next few months. As a reminder, in the depths of the market turmoil earlier this year, the yield on the 10-year had plunged to an all-time low of 0.32%.
  3. Literally or Figuratively, Divided Government Likely: While votes continue to be counted and recounted, two new elections will quickly take center stage over the coming weeks. In terms of the Senate, Georgia law requires that a candidate receive at least 50% of the vote to be elected. If that is not the case, the election goes to a runoff between the top two candidates. Since no candidate finished with greater than 50% in either of the two Georgia Senate races, those two elections will now go to a runoff election which is slated for January 5. Most believe that Republicans are likely to win at least one of those races, which would give them at least a 51-seat majority in the Senate. Were that to be the case, a divided government will continue in Washington, with compromise required to pass legislation. However, even if both of the Georgia races go against the Republicans, one could argue a degree of divided government will still exist. That is the case since Democrats lost seats in the House and will now have a very slim majority. In fact, according to the Wall Street Journal, the expected majority is likely to be the smallest the Democrats have had to work with since the 1943-1945 session. This will no-doubt present challenges, and may require them to pull along Republican votes to pass legislation.  So far, the markets have interpreted this favorably in that a more moderate, market friendly agenda seems probable.
Week (%)YTD (%)1-Year (%)3-Year (%)5-Year (%)Dividend Yield (%)
Equities      
S&P 500 0.8 11.2 16.6 45.2 91.1 1.62
Russell 1000 Value 3.5 (4.6) (1.0) 15.8 47.3 2.41
Russell 1000 Growth (1.8) 28.8 36.2 78.5 142.1 0.77
Russell 2000 3.0 3.6 8.6 20.7 58.7 1.44
MSCI EAFE 4.5 0.8 3.9 10.1 35.8 2.75*
MSCI EM (Emerging Markets) 1.4 8.4 14.8 13.8 62.4 2.30*
WeekYTD1-Year3-Year5-YearDividend Yield
Fixed Income      
Bloomberg Barclays US Aggregate (0.3) 6.7 7.5 16.7 23.5 1.23
Bloomberg Barclays US High Yield - Corporate 0.5 3.8 5.9 17.1 41.4 4.99
Bloomberg Barclays Municipal Bond 0.1 3.6 4.8 13.0 21.2 1.32
Bloomberg Barclays Global Aggregate x US (Country) (0.7) 6.2 7.9 12.4 24.2 0.75
WeekYTD1-Year3-Year5-YearDividend Yield
Fixed Income      
Bloomberg Barclays US Aggregate (0.3) 6.7 7.5 16.7 23.5 1.23
Bloomberg Barclays US High Yield - Corporate 0.5 3.8 5.9 17.1 41.4 4.99
Bloomberg Barclays Municipal Bond 0.1 3.6 4.8 13.0 21.2 1.32
Bloomberg Barclays Global Aggregate x US (Country) (0.7) 6.2 7.9 12.4 24.2 0.75
1 Week AgoStart of 20201-Year Ago3-Years Ago5-Years AgoCurrent Level
Currencies      
U.S. Dollar per Euro 1.18 1.12 1.10 1.17 1.08 1.18
Japanese Yen per U.S. Dollar 103.66 108.68 109.15 113.29 122.94 105.13
U.S. Dollar per British Pounds 1.31 1.32 1.28 1.32 1.52 1.31

As of November 12, 2020 (close) *Dividend Yield For MSCI EAFE and MSCI EM are from 10/30/2020.

Chart of the Week

Value Line Arithmetic Index – Average Stock Performance

Click a chart to enlarge it.

Value Line Arithmetic Index – Average Stock Performance
Source: Strategas Research Partners

Key Takeaways

The scoreboard over the past three years shows that large cap stocks (S&P 500) and tech stocks, as represented by the NASDAQ Index, have registered huge gains, while small caps and the average stock have made little progress.

Specifically, the NASDAQ has generated an annualized return of 18.8% per year for the three years ending October 31, while the large cap-oriented S&P 500 Index has advanced 10.4% per annum. Over that same time period, the Russell 2000 Index of small cap issues has advanced just over 2% per year, while the Value Line Arithmetic Index has done only modestly better, posting an annual price return of just 2.7%.

As the first panel of the chart above displays, the average stock, as represented by the Value Line Arithmetic Index, is finally breaking out. The same dynamic is taking place within the Russell 2000 Index. Equally, if not more important, as depicted in the lower panel of the chart, the performance of this Index relative to the S&P 500 is also improving. Again, the same dynamic currently exists when looking at small cap stocks relative to the S&P 500.

The past few years have been frustrating, to say the least, for a well-diversified investor with meaningful exposure down the cap spectrum. While it is true that a few months does not make a trend, recent market action could lead one to believe brighter days lie ahead for areas of the market left behind in recent years.

COMMENTARY

Forward S&P 500 Returns When 20-Day Highs > 50%, 55%, 60%
Source: Strategas Research Partners

The move in the market last Monday (November 9) was extremely broad based, with over 70% of the stocks within the S&P 500 Index trading to a 20-day high. That is a relatively rare occurrence, only happening two other times over the past four years.

Not surprising, the charge was led by sectors which should enjoy a far better operating environment post COVID-19, specifically Financials and Industrials. That said, even the sector with the worst ranking for the day, the traditionally defensive Consumer Staples, saw just under 50% of its constituents trade to a 20-day high.

As the chart above displays, historically this type of action (as represented by the green bars) has often led to modest consolidation over the very near-term. However, once that consolidation is complete, forward returns have been above average, and notably so over the next year.

With the S&P 500 near an all-time high, and up over 8% since the end of October, many investors might wonder if a meaningful pullback is in store over the coming months. While that is obviously possible, answering the question using solely the data in the graph above would lead one to conclude otherwise.

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