From Frying Pan to Fire
Doug Walters
COVID cases are spiking. Having survived the election unscathed, investors may feel like they are exiting the frying pan only to be dropped into the fire. Yet there is a lot to be optimistic about, and we once again are asking investors to hold their nerve.
Contributed by Doug Walters , Max Berkovich ,
With the presidential election in the rearview mirror, investors who held their nerve throughout, and stayed fully invested, are feeling vindicated. U.S. stocks are up over 6% since Election Day. We did not predict the rally, rather we prepared for whatever the market had in store. The future is unknowable, and the best approach to investing is always science, not speculation.
Investors have now moved on from the election and set their sights on the rising COVID cases. This week, daily new cases are spiking around the country, and governments and municipalities have been forced to consider instituting (or reinstituting) restrictions to help slow the spread. At the same time, positive vaccine news came out of Pfizer, who announced that emergency use for their candidate could be sought this month, with full approval by the end of the year.
At a human level, it is clear that things are going to get much worse before they get better. Yet for investors, the light at the end of the tunnel is likely much closer. We saw the news from Pfizer begin to drive a rotation out of the “stay home” winners (like Amazon, Apple, Microsoft, Google) and into smaller value companies. As we discussed in our webinar, there has been a big dislocation between small-cap value and large-cap growth. While large-cap growth has led the market thus far this year, there is potential for small-cap and value to assume leadership as investors begin to price in a return to normality as vaccines help to accelerate immunity.
Do we know how stocks will perform over the next three to six months? No. There are plenty of reasons to be optimistic, yet they are somewhat irrelevant. We always recommend not trying to predict the future. Instead, prepare for it, by staying investing in a diversified portfolio at a level of risk that is appropriate for you.
Headlines This Week
The Resurgence
- U.S. coronavirus resurgence hit record highs on Thursday as new-case growth exceeded 150,000 daily cases.
- The hospitalization rate surpassed the high levels seen in the spring.
- New York State imposed new restrictions on bars, restaurants, and gyms that went into effect on Friday.
- Many school districts around the country previously opened with full or hybrid programs are now considering a switch to remote learning.
Still not Stimulated
- Negotiation progress made before the election on the next fiscal stimulus bill has dissipated as the House and Senate continue to debate.
- The House is still insisting on a package worth at least $2.2T, while the Senate is unwilling to spend more than $500B.
- For now, a near term-deal is very unlikely.
- The President has backed away from negotiations leaving the Senate Majority Leader and the Speaker of the House to negotiate directly.
Rotating
- Last week, U.S. equity funds saw the second-largest inflow in a single week, totaling over $32 billion.
- Investors also took profits in “stay home” winners and rotated the gains to companies that benefit from a return to a post-pandemic world, like travel and leisure.
- A meaningful rotation to value and small-capitalization funds stood out after they outperformed growth counterparts.
- Positive vaccine news from Pfizer/BioNTech sped up the rotation of investor funds to both value and small-cap stocks, as investors begin to see the light at the end of the tunnel.
Forward-Looking
- Third-quarter earnings are coming to an end, with over 90% of companies in the S&P 500 already reporting earnings.
- Over 80% of the companies that reported earnings beat their sales and earnings estimates.
- Thus far, the earnings decline for the S&P 500 is around -7.5% vs. the 3rd quarter of last year.
- Many analysts remain positive that companies will return to growing earnings by April of next year or the first quarter of 2021.
The Week Ahead
All Eyes on Augusta
The Masters, one of the major championships in professional golf, started on Thursday and will award the Green Jacket to the winner on Sunday.
- The Tournament was originally scheduled in April, so a mid-November tee-off feels strange.
- The last of the four major golf tournaments, The British Open, was canceled, so The Masters will be the last, not the first, this year.
- Tiger Woods won in 2019 and looks to be in the hunt after round one this year.
Land of the Rising Sun
Japan will report its preliminary 3rd Quarter Gross Domestic Product (GDP) on Sunday.
- A quarterly jump of 4.4% is expected after a 7.9% decline last quarter.
Economic Focus
Import & Export Price Index, building permits, housing starts, weekly jobs data, retail sales, and industrial production are the notable releases in the coming week.
- There will be central bankers scheduled to give speeches regarding their economic outlook in addition to the release of a few regional manufacturing surveys.
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