Summary:
- November was an extraordinary month for stocks globally.
- 0% interest rates and a 64% increase in the money supply create months of speculation, like November.
- Our most important job is to balance the amount of offensive and defensive investments in portfolios given an uncertain near-term future.
Commentary:
Positive vacine news from Pfizer, Moderna and AstraZeneca helped make November an extraordinary month for stocks globally, despite the pandemic still raging in many areas.
Last month, the S&P 500 Index was up +10.8%[i] while the international stocks, as measured by the MSCI EAFE Index Net, gained +15.5%[ii]. Emerging Market stocks (MSCI EM) returned +9.3%[iii]. The standout country returns were two long-term laggards – Spain and Brazil (as calculated by MSCI) – which both increased in the neighborhood of +30%[iv]. Some of the most beaten-down areas of the U.S. market soared in November, including small companies, energy, financials and industrials[v]. CIG’s client accounts tied to growth and balanced approaches generally had one of their best months in the last five years.
Where do we go from here? Near-term performance can be notoriously difficult to predict. As we mentioned in our October update, underneath the surface of a post-election rising market tide, our measures of the underlying health of the markets continue to worsen. For example, on a small scale, recently Zoom Media (ZM) was down more than -15% one day – despite being an essential tool for many and beating investor expectations seemingly on almost every conceivable metric[vi]. When good news doesn’t translate into good stock returns but rather a sharp decline, we perk up our ears.
We, however, remain focused on the big picture. Global stock markets are now worth over $100 trillion, rising to a record high[vii] and equal to 115% of global Gross Domestic Product (GDP), i.e., the sum of all the goods and services produced[viii]. In the U.S., the stock market is unprecidentally expensive and equal to over 180% of the country’s GDP[ix]. While there is great variability about the future, it is likely a mistake to not be careful and thoughtful when buying stocks this expensive.
In markets like November, where the “Fear Of Missing Out (FOMO)” is seemingly driving participants, indepth study of stocks and economies are displaced by emotional biases which are supported by 0% interest rates and a 64% increase in the money supply[x] by the Central Banks. Such speculative behavior is the nature of market cycles and one of the primary elements necessary to create the proper setting for an eventual reversion or change. Last month, we discussed how it appeared that investors in October started to choose between decelerating and expensive large companies versus opportunities in growing and cheaper small companies. Small cap stocks, as measured by the Russell 2000 Index, had their best month ever in November 2020 and gained 18.3%[xi]. Overall, small company stocks are up dramatically off the March 2020 lows[xii] when we added to investments there. While still unconfirmed, evidence of change appears to be beginning.
Our most important question today is how the balance should be set today between aggressiveness and defensiveness in clients portfolios to take just enough risk to generate attractive returns to meet their financial goals in these very uncertain times. Then, how do we apply an active tactical approach and find undervalued investments that are poised to enter a period of market outperformance like the cheaper small companies mentioned above and where client portfolios already have some investments. All year, we have had a plan for more offensive investments if the economy does get better as well as a plan for the opposite outcome. In December, we added to an investment which we expect would increase in value if people stay and shop at home more. As always, we will continue to apply diversification and balance between the appropriate risk and returns.
Please be well and stay safe. We are encouraged by the latest vaccine results but expect a dark, uncertain winter. We suggest continuing to monitor the Johns Hopkins University’s Daily COVID-19 Data in Motion video.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] https://finance.yahoo.com/
[ii] https://www.msci.com/end-of-day-data-search
[iii] https://www.msci.com/end-of-day-data-search
[iv] https://www.msci.com/end-of-day-data-search. MSCI Spain Index Net and Brazil ADR Index Net.
[vi] https://finance.yahoo.com/quote/ZM/history?p=ZM
[vii] https://www.reuters.com/article/us-global-markets/world-shares-hold-close-to-record-highs-u-s-markets-close-for-thanksgiving-idUSKBN28601F
[viii] Bloomberg. WCAUWRLD Index as of 12/5/2020.
[ix] https://www.gurufocus.com/stock-market-valuations.php
[x] https://fred.stlouisfed.org/series/M1
[xi] https://finance.yahoo.com/
[xii] https://finance.yahoo.com/quote/%5ERUT/history?p=%5ERUT
