The Week Ahead
November will likely close with a number of records as far as equity market performance, a bizarre feeling given the current state of the pandemic. However, we are taught to believe that the equity markets (and other risk markets) look forward, and this justifies the record-setting appreciation for now. I am not sure I see why the technical anomalies driving the market higher should end, unless there were to be some sort of unexpected economic or political event. The direction of the virus seems not to matter one bit. Even so, I view this as an optimal time to lighten on risk and to rotate into less expensive sectors / stocks, although I have a hard time completely throwing in the towel on WFH stocks until the dark days of the pandemic are behind us. Even promising developments with respect to vaccines don’t compel me to go all in. It’s this simple – sell high and take some gains off the table whilst they’re available. Maybe it’s the time of year, or maybe it’s just a sneaking suspicion that things aren’t nearly as good as some investors think. One more thing - speaking of vaccines, its nearly Monday, and history has shown us to expect i) a new vaccine, and ii) a red-hot equity market. Or might this streak be broken?
Summary, What Happened Last Week (details below)
We hit all sorts of records mid-week before momentum was interrupted by a cocktail of Thanksgiving and perhaps – just perhaps – a dose of near-term reality setting in as far as the direction of the pandemic and its effect on global economic growth. Still yet, we find ourselves nearing the end of one of the best months ever for global equities. Oil has also been a beneficiary of investors looking ahead to a post-pandemic world, with safe haven assets like the US Dollar and gold bearing the brunt of a shift in momentum that appears to be gaining steam. Increasing US jobless claims are an early sign of what we might expect in the weeks and months ahead until vaccines can receive regulatory approval, be mass produced and administered to the population.
Global Equity Markets
On Tuesday, I wrote an article in emorningcoffee.com entitled “30,000 / 19,000 / 12,000: Go baby go!”, which memorialised the fact that on Tuesday, the Dow Jones IA, Bitcoin and Nasdaq composite blew through 30,000, $19,000 and 12,000, respectively. That about says it all, as this past week looked a lot like the week before, only more of it. The S&P 500 had a solid performance, gaining 2.3% on the week and bringing its November gain to a whopping 11.3%. Unless something shocking happens on Monday, November will reverse losses in the S&P 500 in September and October, re-establishing momentum as we head towards the end of this unusual year. More broadly, the US equity markets outperformed their European counterparts last week, but the S&P 500 has been (relatively speaking) a laggard this month as the FTSE 100 and STOXX 600 have generated monthly returns to date of 14.2% and 14.9%, respectively. The Nikkei 225 has been the real star though, serving up a return last week of 4.4%, bringing its November gain to 16%. This shows the value of international diversification. Here’s a summary of the performance of the four key indices I track.
In the US equity markets, the Russell 2000 continues to benefit from a shift into value stocks, providing a return of 20.6% in November alone, far outperforming the other indices. The DJIA has generated a return of 12.9% in November, slightly better than returns for the S&P 500 (11.3%) and the NASDAQ Composite (11.9%). It does feel that WFH companies are finding renewed support as COVID-19 rages in the US, helping the NASDAQ, the most expensive of the indices which has, consequently, been suffering the most in the shift by equity investors towards value and cyclicals.
I mentioned Bitcoin last week, so I suppose it is worth mentioning again this week given that it closed above $19,000 on Tuesday only to encounter severe selling pressure starting Thursday, pushing this cryptocurrency down the last two trading days of the week to close at $16,814.27. This is a decline of 13.1% from its intraday high on Tuesday, demonstrating the volatility that investors need to be prepared for if playing the cryptocurrency market. The rapid accent sounds a lot like Tesla, as I mentioned last week, but TSLA continues to defy gravity – and logic – soaring nearly 20% just this week. My purchase of short-dated puts Friday before last on Tesla was slightly mis-timed, to say the least! Please don’t ask how the valuations of either Bitcoin or Tesla can be justified – I have no idea!
Credit Markets
Similar to the equity markets, the US credit markets this past week looked very similar to the week before. I only have data through Wednesday because of the Thanksgiving holiday, but the trend remains the same - spreads are grinding tighter, week after week, correlated strongly with the robust performance in equity markets as the “risk on” throttle rachets up higher and higher. CCC corporate spreads – the weakest rated category which consequently has the highest spreads – once again tightened the most in the holiday-shortened week (-36bps) as the outlook for the most pandemic-damaged industries like retail and travel continue to be in favour in spite of the resurgence of the coronavirus. BBB corporate credit spreads tightened a further 4bps through Wednesday, closing the day at +144bps, only 14bps wider than at the end of 2019. Credit remains a well-performing asset class this year across the board, offering good current returns compared to returns on almost any other asset class.
Safe Haven Assets & Oil
Gold and the US Dollar continued their decent as investors fled safe haven assets and rotated into riskier assets like equities and credit. US Treasuries strengthened ever-so-slightly w-o-w as yields declined on Friday, perhaps acknowledging concerns (with the US economy) because of raging COVID-19, or possibly comfort that – if the US government remains unable to provide another round of fiscal policy – the Federal Reserve might step in and work some magic, skewing their QE purchases towards longer-dated US Treasuries to keep yields low. It seems that the downward pressure on UST prices (upward pressure on yields) has abated for the time being, as the near-term economic outlook remains increasingly murky. Gold, on the other hand, continues to fall in price, down 4.4% last week, closing at $1,788.50/ounce, the first time this safe haven asset and inflation hedge has closed below $1,800/ounce since mid-July. This signals some combination of more pessimistic US economic growth, reduced concerns about inflation, or migration away from the protection of gold as risk ramps up in the market. Some of these are conflicting views, but nonetheless, different views affect different investors. Another trend that is continuing is growing investor appetite for riskier assets outside of the US, reflected in the ongoing decline of the US Dollar (down 0.6% last week against a basket). With the US Dollar weakening, the Yen is slowly strengthening. WTI oil also continued its march upwards, closing Friday at $45.52/bbl (+7.9% w-o-w). Similar to equities, buyers of oil are apparently able to “see through the fog” of COVID-19 towards a brighter economic future sometime in 2020. I suppose that suppliers are playing their part too, with a much more coordinated effect to curtail supply as demand wanes.
Economics & Politics
US economic data was mixed this past week, with durable goods orders and housing data coming in positive, but an increase in first-time jobless claims for the second week running (778k, vs consensus expectations of 733k and week prior of 742k) and falling personal incomes, providing a glimpse of what might lay ahead as far as deteriorating economic growth for the remainder of 2020 and into early 2021. Elsewhere Stateside, the GSA certified the transition of power from the Trump Administration to the incoming administration of President-elect Joe Biden, as Mr Biden continues to fill cabinet positions with a diverse group of experienced individuals. POTUS continues to challenge the election results, but he looks to be nearly out of options as Americans breathe a sigh of relief. Contrary to what many thought, the American system of democracy looks to be intact and is properly functioning.
Chancellor Rishi Sunak provided a look into the finances of the UK mid-week in a spending review, and it was not pretty. The UK expects the economy to contract 11.3% – the most in 300 years – and for unemployment to peak at 7.5% by mid-year 2021. Borrowing will be increased by nearly £394 billion (19% of GDP), the most in peacetime ever, and government debt is expected to increase to 91.9% of GDP. You can see Rishi Sunak’s statement to the House of Commons from the FT here, and the official Office for Budget Responsibility (OBR) economic projections for the next five years here. Of course, one positive step forward for the UK (and EU) would to be a post-BREXIT trade deal agreed. We are nearly at the end of November with the stalemate continuing, a subject I covered earlier this week in my blog: “BREXIT: UK-EU trade agreement, hurry up!” As of the time I am writing this (Nov 28th), there has been little more said about a post-BREXIT trade deal, and time is running out.
COVID-19
In a nutshell, the spread of the pandemic is slowing gradually in Europe as counties benefit from restrictions put in place in October and early November. However, the approach remains very cautious as we head towards Christmas and the new year. The UK is a perfect example, as lock-downs will ease after December 2, but only marginally in most parts of the UK, with retail stores, hair salons, gyms/spas and restaurants opening, but with severe restrictions on the number and “category” of people that can gather.
Overall, November will be the highest month in terms of new cases of and deaths from COVID-19, as you can see in the table to the right. Until November, mortality according to these figures had been declining each month but seems to have stagnated around 1.5%-1.6% in November.
The US is getting worse and is likely to continue to do so, with Thanksgiving having come and gone and Christmas on the horizon. According to the TSA (data here), just over 1.07 million travellers went through airports on Wednesday in the US, prior to the Thanksgiving holiday. This is the highest number of passengers since March 16th and could mean that another surge in COVID-19 infections might occur in early / mid-December. The run-rate in the US has increased to 260,000 cases/day, adding quickly to the 13 million Americans that have been infected.
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