Investors Embrace Risk Assets and Tip the Scale from Fear to Greed
U.S. stocks staged a formidable rally to new record highs fueled by optimism on promising vaccine trials and the prospects of a path to a less restrictive new normal for businesses and consumers.
Right on cue, market volatility (measured by the VIX Index) dropped to pre‑pandemic levels, in line with post‑election historical norms. Investors are looking through to brighter skies next year and taking on incremental risk in their portfolios.
|Market Index Returns||Nov 2020||YTD 2020|
|S&P 500 Index||11.0%||14.0%|
|Russell 2000 Index||18.4%||10.4%|
|MSCI EAFE Index||15.5%||3.0%|
|Barclays US Agg. Bond Index||1.0%||7.4%|
|FTSE 3 Mo. T‑Bill Index||0.0%||0.6%|
Stock Market Review & Outlook
Best November for U.S. Stocks in Decades
All three major U.S. stock indices reached new record highs in November. The 11% return of the S&P 500 is the best since the sharp market rebound staged in April. The technology‑focused Nasdaq Composite advanced by 12%. A similar return for the Dow Jones Industrial Average was the best monthly return in 33 years based on a turnaround in more cyclical sectors of the market.
Energy and financials were the strongest contributors to the gains, recouping some of the significant losses incurred earlier in the year. Small cap stocks, which typically perform best during periods of economic expansion, also shined. The Russell 2000 Index had the best historical monthly return since the inception of the index over 40 years ago. Strong returns for international equities pulled the MSCI EAFE Index back into positive territory on the year as well.
|S&P 500 Sector Returns||Nov 2020||YTD 2020|
Economic Review & Outlook
Housing Creates a Solid Economic Foundation
Economic growth in the U.S. continues to be on the mend. Housing remains a rock‑solid contributor as the year‑on‑year rise in new and existing homes continues at a rapid pace. Available inventory is scarce due to red hot buyer demand. Manufacturing indices continue to hold at an expansionary level. Durable Goods Orders rose last month, driven by demand for computers and electronics equipment while consumer spending on apparel and restaurants has pulled back. Employment headwinds persist however, with Weekly Jobless Claims on the rise and over 20 million Americans still receiving jobless aid from state and federal programs.
Chart of the Month
Investor Greed is Full Speed Ahead, Leaving Fear in the Rearview Mirror
The CNN Fear and Greed Index uses a series of market metrics relating to price strength, momentum, options trading and volatility to gauge investor risk sentiment. Over the course of the last month, sentiment has swung dramatically into the “risk on” camp. It was only one month ago that investor behavior was showing signs of hunkering down with safe haven, lower risk, investments.
COVID‑19 cases and hospitalization rates continue to rise in a meaningful way at the same time that positive news on vaccine trials shines a light toward the end of a longer tunnel than most expected. The path forward for a transition of power in the White House has now become clearer. Investor optimism, loosely described as “greed” in the chart above, is focused in on the good news. When investor optimism swings in such dramatic fashion as it has of late, market moves based on (positive and negative) headlines typically become more pronounced. We will be looking for opportunities to deploy capital in companies in which stock price swings do not align with our view of intrinsic value.
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