November provided a glimpse of what the markets could be in a world where COVID-19 is under control. News of multiple vaccines with effective late phase trials lit a fire under stock prices. The stay at home stocks sustained the stock market over the past eight months, however it was the beaten down industry stocks that fueled November’s rally. Energy, airlines, travel and leisure industries exploded higher as investors envisioned a return to life as we knew it. There were a few bumps in the road on the path to all-time high market indices. COVID-19 cases are peaking once again, and some states are implementing a second round of economic shutdowns. This tug of war between economic shutdowns and open for business will likely continue until a proven vaccine is successfully administered to the general population.
The market is also anticipating fiscal stimulus coming to fruition. The announcement of former Federal Reserve Chair, Janet Yellen, as the incoming Treasury Secretary increases the likelihood of a meaningful stimulus package in the near future. An accommodative Federal Reserve headed by her former colleague, Chairman Jay Powell, coupled with Yellen promoting fiscal stimulus to a politically friendly audience will be bullish for stocks in the near term.
The economic numbers released in November were overshadowed by the vaccine news of the day. Regardless, the economy continues to grind forward. The October unemployment report produced 638,000 new jobs, a slight downtick from the 672,000 gained in September. The unemployment rate fell a full percent to 6.9%. Inflation news continues positive for the markets. The Consumer Price Index (CPI) was flat for the month and up a tame 1.2% on a year-over-year basis. Similarly, the Producer Price Index (PPI) was up 0.1% for the month and up 1.1% over the past year. The revised Gross Domestic Product (GDP) confirmed the third quarter 33.1% growth rate. The consumer pulled back a bit as reflected in lower than expected numbers on both consumer confidence and retail sales. By every measure, the housing market continues to be red hot. 1
The stock market leaped higher in anticipation of a successful vaccine rollout. The Dow Jones Industrial Average crossed the 30,000 level for the first time. The Dow had collapsed to 18,200 just eight short months ago. This wild ride has played out in all the other major indices also. The November rally saw a definitive change in leadership as technology took a backseat to the energy, industrial and material sectors. The Dow led the U.S. November charge posting a 12.1% return for the month, its best monthly return in 33 years and the highest November return since 1928. The S&P 500 posted gains of 11.0% while the NASDAQ Composite added 11.9% in November. International stocks also had a profitable month with international developed stock markets rising 15.5% and emerging markets adding 9.3% in this bullish month. 2
The U.S. Treasury yield curve was little changed in November with inflation low and the Federal Reserve squarely on the sidelines. Low interest rates are likely here for the foreseeable future. Until the economy is fully healed and/or inflation becomes a serious problem, expect interest rates to remain low. In November, the 2-year U.S. Treasury note rose 2 basis points to yield 0.16% at month end. At the longer end of the yield curve, 10-year note and the 30-year U.S. Treasury bond yields fell. Interest rates on the 10-year and 30-year declined 4 and 7 basis points respectively bringing their month end yield to 0.84% and 1.58%. Mortgage rates remain low helping to sustain the strong housing market. Credit spreads in both high yield and investment grade corporate debt tightened meaningfully during the month. 3/4
Hopefully, this parabolic move higher in stock prices has found its way into your investment portfolio. Once again, it is an appropriate time to review your asset allocations as 2021 is just around the corner. If the positive price action in the markets has your portfolio overweight in stocks and underweight in bonds and cash, now is a perfect time to reevaluate your asset allocation. A 10-15% correction in stock prices would not be a total surprise at these valuation levels. It is better to implement a portfolio rebalancing after a period of market strength rather than after a market correction comes along. While we are constructive on the markets in 2021, participating with a balanced approached will be less stressful than being caught offsides.
MARKETS BY THE NUMBERS: