The Quick Summary: 

1) US equity markets are near all-time highs. 

2) Interest rates remain range-bound and credit spreads are narrow. 3) The rotation to value continued. 

4) A positive vaccine rollout timeline is fueling optimism.

5) The US government transition is proceeding but the GA Senate race outcomes are key.

6) The virus continues to surge and the effect on the economy over the next four months is highly uncertain. 

7) The outcome of next US fiscal stimulus package will be key to the bridge from now until when widespread immunity is achieved. 

8) Longer-term debt and monetary issues pose challenges to stability after the virus is under control.

9) Investor sentiment is near extreme highs.  

10) The current environment warrants continued conservative exposures to asset classes.

The S&P 500 closed at an all-time high on November 16th and at another one on the 27th. It closed the month of November up 10.9%. The Dow crossed over the 30,000 mark for the first time ever, creating the usual hullabaloo in the financial press. Value outperformed growth for the month and small strongly outperformed large with the Russell 2000 Value up 19.3% versus the Russell 1000 growth up 10.2%. The  NASDAQ 100 (the “QQQ’s”) rose 11.2%. International developed markets, which have a heavier weighting in value and cyclical companies, rose 15.4%, and the emerging markets rose 9.3% driven by outsized gains in Brazil and Russia but with China up only 2.7%. 

The 10-year US Treasury yield had an exciting ride. It declined to 0.77% on the heels of the election but then quickly rose to 0.97% after the first of three positive vaccine announcements. Ultimately, the curve closed the month almost unchanged, but credit spreads narrowed significantly. The dollar hit a new low for the year, and volatility returned to still elevated but more muted levels. 

Three very positive vaccine announcements on three successive Mondays. BioNTech, Moderna and  AstraZeneca. All with very high levels of efficacy, all with production ready to go and distribution reasonably far along in the planning. The similar levels of success (although AstraZeneca’s has a couple of asterisks)  seem to be giving improved confidence that this is for real. Emergency Use Authorization is expected to be officially granted in December and little time is likely to be lost in getting vaccinations to those most in need with a start possible before year end. Estimates are pointing to a beginning of more widespread availability to the general population beginning as early as April of 2021. The big guns of human ingenuity are rolling in in record time. The battle of the laboratories appears to be on a visible path to victory. 

The people versus the COVID-19. The battle on the ground at the infantry level, however, is back to very dangerous levels. The large numbers of cases and deaths are nothing short of tragic. The resources to help the seriously ill are once again at or near the breaking point in many locales. Hospitalizations have risen back to the point of overwhelming the beds, supplies and staff available to treat the suffering, and other healthcare needs are again being crowded out.  

Governments are doing their best to balance the implementation of public policies with difficult to judge interactions: 1) significantly reduce the spread of COVID, 2) maximize social compliance, and 3) keep people working and spending, and businesses from failing. On one end is Australia. They just shut everything down as soon as there is an infection or two. Almost literally. And the population has been supportive for the  most part. No infection, but no economy. On the other end is Europe and the US. Go slow approach starting with soft closings (…we’ll just close the bars at 10:00…) and reluctantly tightening the restrictions from there. And a populace with the compliance of a Weimaraner puppy in training. They try, really, sort of, but often lose their focus and do what they want. It doesn’t help that the disease is getting to be widespread enough that understanding from where the outbreaks are coming is close to fruitless. And nobody wants to ruin Christmas. 

As a result, the peak of infection in the US and Europe is still likely several weeks away. 

The transition and adjustment to the new executive, legislative and judicial configurations is proceeding.  The final piece is the outcome of the Senate elections in Georgia on January 5th. Although the outcome will make a difference at the margin, the broader parameters are unlikely to change much from what is currently understood. That is to say, a divided “mandate,” an opportunity to reset relationships and try to move the needle to the positive side of the cooperation meter, and pragmatic moves to the middle on issues heretofore more on the divisive side. The next stimulus package has favorable odds of being buttoned up somewhere around the $1.0 trillion mark before January is out. New tax rates are likely to be put in place, but maybe not so different from where they are now. The regulatory climate will almost certainly stiffen but is expected to be palatable to conducting business. Trade tensions are expected to have a more optimistic tenor. All in all, the general hope is that the stability, predictability and visibility emanating from the United States government should improve somewhat. 

Between here and there. The more immediate question marks will focus on what will happen with employment and the consumer (and stimulus and debt levels) as the virus works its way through the unvaccinated and as-yet uninfected through a winter that has not even started. How will the next round(s)  of restrictions be implemented and play out? What will people choose to do with their time and their money? The latest data we have is for November, but it was not much affected by the new surges. The month of December is not really like any other month of the year. Starting with Thanksgiving (Halloween?),  it is the most consuming-est time of the year and celebratory. Activity is down from last year but not as much as might be expected. There was quite a bit of seemingly stubborn travel over the Thanksgiving holiday despite the public service announcements warning people to stay home, and money was spent  (although increasingly on-line). December is showing promise of being festive as well, but what happens in the cold drawn-out months of January and February when the check comes around and the damage is tabulated? April and May can seem far away when the days are short.  

Once we get to “there.” This will be when everyone who wants to be vaccinated, has been vaccinated. This will be when there are no more restrictions. This will be when the storm is over and the floodwaters have receded and commerce and society will have some decent visibility of the future once again. Then we’ll start to get to see what has permanently changed in how we live our lives. What will happen with borrowing and lending, with restaurants and travel, and shopping and nesting and cleaning, and working, learning,  playing, eating and exercising from home? What will happen to the airlines, aerospace, cruise ships, hotels,  casinos, department stores and apparel and accessories companies? To the energy stocks, banks and industrial metals? 

The real action lately has been the rush to even things out. The rotation to the down-and-out. To the stocks of the companies whose share prices had been obliterated. Nobody (of the 11 S&P 500 sectors) was more down-and-out than the energy sector. It declined 60% from December 31, 2019 to March 23, 2020  and was still down -51% for the year on October 28th. Not even one month later (November 24th) it was up  45% from that bottom, a breathtaking run, but still off -29% from the beginning of the year. The banking group had a similar experience, as did Boeing and Delta and travel and malls. The light at the end of the re opening tunnel meant the yawning gap between the performance of growth/momentum and value/cyclical needed to be right sized. That process has so far made a good dent in the disparity, but the gap is still very large, still on the extreme end. Once we get to “there,” the gap is likely to be smaller still, but at some point,  the differential between the longer-term growth rates of the slow and the fast may arrest the closing of the gap. The differences between the secular growth rates of “cloud” versus loans or plane travel, for example,  will remain large and intact. 

Longer-term, the macroeconomic picture is much more concerning. Companies will come and go, ebb and flow, but the firmament, the ether, in which they operate will be increasingly sketchy. Total worldwide fiscal stimulus is likely to remain very large, monetary policy is likely to remain very accommodative, and deficits are likely to remain very burdensome. The short-term effect is that we will have survived the pandemic without an economic collapse. The long-term effects, however, will be more difficult to handicap.  We believe that as economic activity re-accelerates, pressure on pricing will be up, not down, and that interest rates stand a substantial chance of finally beginning to rise. Currencies will be volatile relative to one another and the possibility of a broad decline in their values relative to real goods and services will rise.  In this environment, equity prices could be volatile, rising substantially but also subject to sudden large corrections. The level of debt and deficits is multiples of anything the world has ever experienced, and governments and central banks will have to confront the long-term implications. The debt will be difficult if not impossible to repay from traditional economic growth and the experiment with Modern Monetary  Theory will gather momentum. 

As we approach year-end, optimism is quite high. Sentiment is at bullish highs, cash levels are at lows,  allocations to equities are close to extreme bullish, and global growth and profit optimism is near a long term high as are expectations for a steeper yield curve. Equities continue to be underpinned by the buy the-dip and there-is-no-alternative mind sets. 

We are currently relatively conservative, emphasizing quality and diversification in this environment.  Taking measured, thoughtful and prudent steps, and keeping positioning away from extremes is the best way to manage uncertainty. Our positioning had been increasingly conservative prior to the abrupt change brought about by COVID-19 and has become more conservative since. Our strategies are now positioned with almost no exposure to credit, and lower and more style-neutral levels of equities. We retain a significant exposure to gold. Our fixed income duration is neutral excluding cash, but we are overweight cash. We expect to remain conservative and measured in our positioning and look to execute on additional  asymmetric risk/reward opportunities as they arise. 

Source: FactSet’s StreetAccount – All information above (unless otherwise noted), to include dates, returns and  performance is derived from the noted source. 

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