Weekly Market Update (November 09, 2020 – November 13, 2020)
By: Craig Fehr, CFA November 13, 2020
The S&P 500 closed at a new record high and global equities posted a second week of gains following news of progress in developing a COVID-19 vaccine. Stocks surged on Monday after Pfizer and BioNTech announced that their vaccine had 90% effectiveness in their large study, triggering a wave of hope and optimism that a medical solution will address the health crisis and accelerate the economic recovery. Cyclical sectors that have been negatively impacted by the pandemic and are more sensitive to the reopening of the economy outperformed last week, while sectors that have benefited from the pandemic underperformed. A similar rotation occurred across asset classes, with small-cap and international stocks outpacing U.S. large-caps. The encouraging vaccine news is consistent with our view that the economic recovery will be sustainable heading into and through 2021, but near-term uncertainties could still trigger volatility. Mass production and widespread distribution of a vaccine will likely take months, and in the meantime the virus will continue to shape the direction of the economy, suggesting that balance and diversification across sectors and asset classes are warranted.
Vaccine for Volatility?
In what surely qualifies as some of the more encouraging news of the year, the announcement that a Pfizer vaccine showed promising trial results powered markets higher last week. The coast isn’t clear, but the light at the end of the pandemic tunnel got a bit brighter. With U.S. equities up an impressive 10% in just the past two weeks, and with the spotlight likely to shine intensely not only on virus-case counts, but also on policy responses and the path of the recovery as we head into the holiday season, here are three key takeaways from last week1:
1. A vaccine sets a healthy foundation but won’t immunize the market from volatility.
- Gains were solid but not steady last week, with the S&P 500 rising 2.2% in see-saw fashion1. We think the improved prospects for a vaccine establish a bit of a safety net under the market, but they won’t prevent spells of weakness.
- The spike in new COVID-19 cases and hospitalizations will likely be the key instigator of market swings in the weeks ahead. The strong rally in U.S. stocks since midsummer has been driven by progress in reopening the economy. The surge in infections stunts that progress, with several areas, including Chicago and New York, imposing tighter restrictions to mitigate the spread. We don’t think we’ll return to the lockdown measures of earlier this year, but the pace of the rebound in economic activity is likely to stall somewhat in the coming months. We suspect market sentiment will oscillate between vaccine optimism and near-term infection and reopening concerns.
- The passing of the presidential election (recognizing certain state results remain contested at this point) brought an initial relief rally in stocks, as a presumed divided government soothed some market fears around potential sweeping tax changes. The political dust has settled somewhat, but it’s not yet gone. Runoff elections for two Georgia Senate seats won’t conclude until early January, with Senate control hanging in the balance. Democrat wins in both races would shift Congressional control to the Democrats, which we suspect would renew political market volatility. Further, with a fiscal-aid package increasingly important amid a stall in the reopening of the economy, partisan disagreements that delay a fiscal response until January (inauguration and completion of the Senate races) or later represent another potential source of market anxiety.
- We think the financial markets will keep at least one eye firmly on the post-vaccine recovery, supporting a positive outlook in 2021, but investors should expect bouts of volatility along the way.
2. The latest data signals the pillars of the recovery remain intact.
- Initial jobless claims last week fell to 709,000, the fourth consecutive weekly decline and the lowest reading since the pandemic began. This signals the continued healing of the labor market, which will be one of the most influential drivers of the sustained economic recovery, given the importance of consumer spending for GDP growth. We could see the pace of improvement in hiring stall somewhat due to the recent surge in virus cases, but we expect unemployment to decline further in 2021, supporting household consumption and an enduring economic expansion.
- Third-quarter earnings announcements are wrapping up, and corporate profits broadly came in ahead of expectations, with more than 80% of companies beating estimates by an average of 17%1. The technology, health care and communications services sectors reported earnings above the same period a year ago, reflecting the ability for many companies and industries to effectively navigate, or even thrive in, the difficult pandemic environment. At the same time, profits in the industrial, energy and financial services sectors remain well below levels of last year. Overall, resilient corporate earnings set an encouraging foundation for further market gains, with current consensus estimates of 22% S&P 500 profit growth in 20211.
- Consumer price data released last week showed that core inflation dropped back a bit last month, with prices rising at a subdued 1.6%. Slower demand for services was a key driver behind the modest inflation reading, a trend that is unlikely to shift dramatically in the near term. This, in our view, should keep inflation running below the Fed’s longer-term target, giving the central bank the breathing room to keep its foot firmly on the stimulus pedal for an extended period. Monetary-policy stimulus, combined with fiscal stimulus and an eventual widely distributed vaccine, forms a potent combination that should support the economic rebound through 2021.
3. Flashes of rotation support the case for diversification.
- The vaccine news sparked a rotation last week, providing a boost to pandemic laggards, while pandemic leaders trailed. Technology, growth, and so-called “stay-at-home” investments have been strong outperformers during the rally since late-March. However, vaccine hopes sparked increased confidence in the return to more normal economic conditions, driving leadership in cyclical, value and small-cap shares.
- International stocks gained 4% last week compared with 2.2% for U.S. equities, signaling increased optimism in the longer-term global rebound1. The financials, industrials and energy sectors were among the strongest performers last week, while the technology sector trailed1.
- We think the rotation last week was an appropriate market reaction. As the post-vaccine expansion extends in the future, we anticipate additional rotation as economically sensitive, cyclical investments benefit from persistent growth. That said, we doubt the rotation will be consistent or uninterrupted. We recommend investors use recent market moves to evaluate rebalancing opportunities that can enhance balance across asset classes and sectors, and maintain appropriate diversification that can help navigate the path ahead.
Craig Fehr, CFA
The Week Ahead
Important economic data being released include retail sales and industrial production on Tuesday, building permits on Wednesday, and the leading index on Friday.
The Weekly Market Update is published every Friday, after market close.
This is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.
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Past performance does not guarantee future results.
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