SUMMARY
Positive news related to COVID-19 vaccines and fresh hopes for US fiscal stimulus breathed new life into risk assets in November. The Dow and S&P 500 posted fresh all-time highs yet again while US Treasury yields backed up to the highest rates since March. The Dollar remained under considerable pressure, highlighted by the Euro which punched through the 1.20 mark vs the USD, providing a broad headwind for Gold and US multinationals. Crude oil tracked to the highest levels this spring, up +27% on the month as OPEC+ producers reached a deal to gradually raise output by 500K barrels per day per month, beginning in early 2021.
The US November jobs report highlighted how the renewed surge in coronavirus cases and restrictions has weighed on services demand. A drop in the participation rate and a continued rise in long-term unemployment signalled some out of work Americans have given up looking for a job. The news was seen by many to support the need for urgent action on new fiscal stimulus and, along with surprisingly strong wage growth, kept upward pressure on US Treasury yields. The 2-10 year yield spread topped 80 basis points for the first time since February 2018 as the 10-year yield reached its highest level since March. The Greenback stabilised at two-year lows ahead of the data, but its footing remained tenuous. For the month, the S&P gained +11%, the DJIA added +12.1%, and the Nasdaq was up +11.1%.
Key Takeaways for November
- Equity markets rocketed higher, on the back of a plethora of positive COVID-19 vaccine-related news, which could see distribution by year-end 2020
- Value sector stocks had their best month on record and largest outperformance vs Growth in close in over ten years
- Small-caps and Micro-caps had their best month on record seen in the Russell 2000 and Russell Microcap indices
- The Dow Jones index has it's best month since 1987
- Energy stocks posted healthy gains with the sector up +28% in November on the back of a +27% rise in WTI Crude
- Transport stocks rebounded with Airlines posting their best month on record
- Copper broke out of a 7-year consolidation range posting the best monthly performance in 9 years
US Election Results
Amongst a backdrop of record turnout for voters and a fiercely contested presidential election, Joe Biden has defeated Donald Trump by an electoral college majority of 306 to 232 which is the same margin Trump won by in 2016. Biden managed to win five key battleground states, previously won by Trump in 2016 - AZ, GA, PA, WI, MI. Republicans have gained ten seats in the House at the time of writing, several electorates remain too close to call, and the Democrats are expected to hold the closest majority in close to 80 years. Currently, the Republicans have the majority in the Senate, but two run-off elections which are taking place in Georgia in early January could result in a 50-50 split. This has implication on the timing and size of the fiscal stimulus package, corporate tax reform, and might cause the Fed to pause until the January FOMC meeting to extend the QE program to consider the size and scale of any fiscal package.
COVID-19 Developments
Coronavirus cases in the US surpassed the 10 million mark, with the third-wave accelerating faster than previously in the warmer months. Optimism about the vaccine is percolating following many positive announcements announced by Pfizer, AstraZeneca, Moderna following the US election.
The FDA is expected to announce Emergency Use Authorisation for the vaccine later in December and markets are pricing in the remarkably high efficacy rates of between 90-95% of the phase-3 trials.
Equity Index Returns
Investors piled into equities on the back of positive news relating to the vaccine, with all major indices posting double-digit gains on the month. We saw a strong rotation out of the notable 'working from home' names back into 'recovery' stocks, with a considerable bias towards small to mid-caps and multiple sectors setting historic monthly performance records.
Interestingly, Value has outperformed Growth stocks for the last three months, with the Rusell 1000 Value Index posting a +13.3% return in November compared to its Growth Index counterpart rising +9.6% (+3.8% outperformance) which is the largest since September 2008.
The Russell 2000 and the Russell Microcap indexes both had their best monthly performance ever, each posting fresh all-time highs above the previous highs seen in 2018. The S&P Midcap 400 Index also performed strongly with a +14.1% gain on the month, the best since April 2019.
Large caps didn't miss the party either with the Dow Jones Industrial Index lifting above the 30,000 level for the first time, ending the sectors two months in the red with a +12.1% return in November. The S&P 500 posted healthy gains with an +11% return, and the Nasdaq 100 bounced 1.5% within its all-time highs with an +11.1% return.
Looking closer at the sector level, we saw names which have lagged throughout the year bounce sharply, with energy leading the charge up +28% on the month, financials followed suit up +16% with their best monthly gains since April 2009. Several sub-sectors posted truly eye-watering returns with Oil services up +45.7%, Airlines +43.1%, Exploration & Production +36.7%, Defence and Space +25.4% and Solar +25.1%.
Third-quarter earnings season is mostly behind us with a record of 84% of S&P500 companies beating EPS consensus. Earnings declined only 6.3%, which was better than the expected 21% decline, which was expected at the start of the quarter.
Treasuries, Commodities and the US Dollar
US treasuries saw demand despite the extreme risk-on tone in the equity markets, leaving many bond investors perplexed. The yield on the US 10 Year was at 0.84%, and the US 30 Year yield declined slightly to 1.57%. Treasury dealers noted the uncertainty surrounding the size and timing of the next fiscal stimulus package and the possibility of further QE coming from the FOMC meeting could keep markets range-bound for the moment.
WTI Crude bounced to its highest levels since the COVID-19 crisis began in March and Copper broke out of a multi-year consolidation to post +12.2% gains on the month, having its best performance in almost nine years. Copper is up close to +70% from the lows seen in March and has now broken out of a significant technical level according to some analysts.
The allure of Gold is starting to falter with the precious metal declining for the fourth consecutive month down -5.4% in November but remains in positive territory for the year at +17.2% YTD. Gold has given back over -15% from the highs seen in August and has broken critical technical levels around $1800 per ounce.
After breaking down from a multi-year uptrend in June, the US Dollar index has continued to decline in six of the last eight months, registering a -2.2% decline for November. Whilst the risk-on tone in equity markets continues, the US Dollar is expected to remain under pressure with the next notable support level seen around 88.25 in the US Dollar Index.
The Months Ahead
Markets seem to be looking past the deteriorating pandemic issues and increase in lockdowns in the hope that a new vaccine will allow for a permanent reopening of the economy and a broad recovery in 2021. Although we see solid price action and technical breakouts across many different markets above multi-year ranges, which can serve as a precursor to economic recovery, the risk of a near-term correction remains high as markets are very extended at current levels. Sentiment indicators such as put/call ratios and surveys of investment managers are approaching highly bullish levels, which often serves as a contrarian indicator that a change in market direction is coming.
Seasonally, December carries favourable tailwinds for equity markets, going as far back is the 1950s, but this was not the case in 2019, showing the averages don't always go to plan, which has undoubtedly been the theme of 2020. Markets have a lot to digest in the coming months, including the timing and effectiveness of the vaccine, the US fiscal stimulus and additional monetary policy in the US.