November 2020 | Equity Commentary

Published on Dec. 8, 2020

November 2020 | Equity Commentary

Market Overview

Markets enjoyed an historic November, with multiple indices hitting all-time records, including the S&P 500 which was about 11% higher for the month. Investors were likely encouraged by better than expected results from Covid-19 vaccine trials, and it now appears likely that a vaccine may be available on a widespread basis by the middle of next year. We also think that investors were pleased with the U.S. election, which looks to have resulted in a divided government, though some uncertainty remains as the balance of power in the Senate will not be resolved until the Georgia runoffs in early January.

Stocks showed strength during November. The Russell 2000 advanced just over 16%, its best monthly performance since the index began in 1984, and the S&P 500’s 11% gain marked its strongest November since 1928.We believe the key catalyst for these gains was progress on the coronavirus vaccine, as there finally appears to be some light at the end of this dark, pandemic plagued period. For the first time in a while, economists may be able to project a return to normalcy, perhaps over the next several months as vaccines are rolled out on a widespread basis.

To be sure, current conditions remain challenging. In the U.S., new cases and hospitalizations are shattering prior peaks from earlier in the year, and it seems likely that conditions will continue to deteriorate over the near term. Still, there are reasons to believe that capital markets can endure this interim period, particularly if economic activity continues to hold up well. Prior peaks ultimately receded after people adapted their behavior to reduce infection risk. These behaviors also provided health care professionals, policy makers, and corporations valuable experience in managing their way through the pandemic. We are therefore optimistic that despite the difficult conditions that are likely to persist over the next few months, stocks need not suffer the same fate as earlier in the year when markets crashed during the beginnings of the pandemic.

We have been impressed with the resiliency of economic activity over the last several weeks. Our expectation was that growth was likely to decelerate with coronavirus conditions worsening and the stimulative effects from the CARES Act waning. However, it appears that the economy has held up rather well. Markit’s November composite PMI, which aggregates the service and manufacturing sectors, came in at a healthy 57.9, the best mark in over 5 years. Housing remains robust, with continued strength in existing home sales and a record high NAHB homebuilder survey aided by very low mortgage rates. This may also bode well for future expenditures on renovation and repair activity. While November’s monthly jobs report missed expectations, we believe that this may increase the odds of an agreement on a fiscal stimulus package before year end.

Heading into last month’s election, our view was that a key risk factor was the possibility of a sustained period of uncertainty given the potential for a contested result, perhaps similar to what transpired during the 2000 presidential contest. In this regard, while President Trump has yet to concede and there are still lawsuits working their way through the courts, all indications are that come January Joe Biden will be inaugurated as the 46th president of the United States of America. There remains uncertainty in the Senate however, where the balance of power will not be determined until the Georgia runoffs next month. Still, with Democrats having to take both races to secure the majority, we think the most likely outcome, and the one which is currently baked into markets, is a divided government with a Democratic president and House majority, and Republicans maintaining control of the Senate. We think that this scenario would have mixed implications for capital markets. It is unlikely that much would change with regards to U.S. tax policy, which we view as market friendly. However, we think that the likelihood of another large round of fiscal stimulus next year may be lower should Republicans hold the Senate majority.

We do expect that at some point, should these risks moderate and the expansion prove sustainable, that these aforementioned sectors of the market will begin to out perform. A successful passage of an additional stimulus bill would also likely benefit these types of stocks disproportionately, in our view. However, we believe that the most prudent strategy to navigate these turbulent currents is to take a diversified, balanced approach. We continue to own shares of companies that we expect should perform well as economic growth recovers, but we also maintain positions in companies that we think would be relative out performers should rising COVID-19 cases necessitate further shutdowns, resulting in weaker economic activity.

The key debate for investors going forward, in our view, is whether and to what extent an air pocket may develop in the coming months, whereby worsening coronavirus conditions derail the economy prior to vaccines becoming widely available. The early indications from a capital markets perspective in this regard have been quite positive, as stocks soared last month on favorable vaccine news despite the sharp increase in new COVID case counts and hospitalizations. Investors have at least thus far been looking through the deteriorating near-term circumstances and have focused instead on the potential for a return to normalcy.

We see reasons for optimism that investor sentiment may remain constructive in the coming months, as we are confident that monetary policy will stay highly accommodative, and we continue to expect at least some degree of additional fiscal stimulus. Moreover, the economy has thus far been quite resilient despite the challenging environment, and multiple forecasts that we track are calling for a strong 4th quarter. Still, risks remain elevated, and it is certainly possible that economic activity may yet fall victim to this latest, most severe wave of the pandemic. In our assessment, however, progress on vaccines and the likelihood of forth coming stimulus should continue to counteract these risks and serve as powerful support factors for stocks, as investors anticipate a hoped-for return to normalcy next year.

As of November 30, 2020

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