November 2020 Stock Market Commentary

Equity markets surged in November as investors turned their focus from a contentious election to optimism around the emerging COVID vaccines. The S&P 500 index advanced +11% in November and is up +14% heading into the last month of 2020. The +12% gain for the Dow Jones Industrial Average marked its best monthly return since 1987. While pandemic-related gains have largely accrued to the larger companies comprising the S&P and the Dow, small- and mid-sized companies rallied +18% on the month, per the Russell 2000 index.  The Russell 2000 index is now up +10% year-to-date, a sign that a broader economic recovery may be taking shape. Overseas stocks also fared well, with the MSCI ACWI ex-US Index advancing +13.5% in November for a +5% gain YTD. Within fixed income, the Barclays Aggregate Bond Index gained another +1% in November (+7% YTD), primarily on strength within corporate bonds as default fears continue to ease.

Though we are not yet out of the woods, with COVID cases again on the rise, the promising vaccine news puts an end to the pandemic in sight. A pending return to normalcy is starting to appear in the underlying data, which we filter through our proprietary Three Dials lens. We summarize our month-end Three Dials readings below, which ticked up during November for the second consecutive monthly increase:

1. Market Sentiment and Momentum: Positive (unchanged from last month)

After November’s market rally, over 80% of issues traded on the New York Stock Exchange are priced above their 200-day moving average, a positive momentum indicator not seen since 2016. While the early pandemic gains were concentrated in a handful of tech stocks, a broader-based rally should lead to more sustained growth over the long-term. Though we could see continued volatility, stocks appear firmly entrenched in their current uptrend, which leaves our Momentum Dial in a Positive position.

2. Economic Fundamentals: Positive (upgraded from Neutral last month)      
   

The current recovery remains far from homogenous, with different industries and geographies grappling with the varied effects of the pandemic, but we are seeing an economy on the mend. Jobless claims continue to fall to new post-COVID lows, as more people head into the holiday season and the new year with gainful employment. After the snap-back GDP growth of 33% for Q3, we expect a return to normalcy of between 2-4% annualized growth going forward. As the data has continued to improve, our Fundamental Dial returns to a Positive position.

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3. Valuation: Negative (unchanged from last month)

Equity valuations remain stretched, as the forward price-to-earnings ratio on the S&P remains well above its long-term average. While low bond yields and high earnings growth coming out of the pandemic may explain part of this phenomenon, we continue to see stretched valuations as a risk to future performance. As such, our Valuation Dial continues to show a Negative reading.

On balance, our Three Dials composite reading has ticked up another notch from last month.  We are slightly overweight equities, versus fixed income with a cautiously optimistic view toward growth assets.

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Sources:

[1] https://www.morningstar.com/ 

[2]https://www.barrons.com/articles/dow-jones-gains-12-for-best-month-since-1987-51606816802

[3]http://www.indexindicators.com/charts/nyse-vs-nyse-stocks-above-200d-sma-params-5y-x-x-x/

[4]https://www.cnbc.com/2020/12/03/jobless-claims-712000-last-week-vs-780000-estimate.html

[5] https://www.frbatlanta.org/cqer/research/gdpnow

[6]Factset.com