Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well. – Warren Buffett
It was a banner week for the stock market as the Dow Jones Industrial Average closed above 30,000 for the first time ever and both the S&P 500 Index and the Nasdaq Composite Index ended the week at all-time highs. All three major stock averages are up more than 10% in the month of November as positive vaccine news is more than offsetting the grim news on the spread of the coronavirus. The Russell 2000 Index of small cap stocks also closed Friday at an all-time high and has risen 20% in November, on track for its best monthly performance since 1987. The primary beneficiaries of a potentially strong economic recovery have been cyclical stocks like industrials, materials, energy and financials, which should perform well as the economy reopens next year. Market participation has broadened out significantly to include these so-called value stocks that have lagged their growth counterparts considerably this year. For the third straight Monday, there was positive vaccine news as Astrazeneca and the University of Oxford announced that their coronavirus vaccine was up to 90% effective, although questions surfaced later in the week about the accuracy of their results. This announcement followed news that vaccines from Moderna and Pfizer and BioNTech were about 95% effective in treating the virus and gave investors hope that the worst may be behind them. Minutes from the Federal Reserve meeting in November were more sobering, however, as Fed officials were concerned about economic growth and discussed adjustments that might be needed to their monthly bond-buying programs to help support the economy. Fed Chair Jerome Powell emphasized that the Fed has plenty of “ammunition” left in the way of monetary policy tools and acknowledged that there likely will be no additional fiscal stimulus passed by Congress before year-end. While officials noted that economic growth and employment levels had improved substantially, they were still well below where they were at the beginning of the year. But with growing optimism over a successful vaccine, maybe a V-shaped economic recovery is still possible after all.
Durable goods orders in October were better than expected and even though consumer spending rose less than in September, it was also higher than forecast. The personal consumption expenditures (PCE) index, the Fed’s preferred measure of inflation, fell to a 1.2% annual rate in October, well below the Fed’s 2% target. Preliminary manufacturing and services sector data rose to multi-year highs and the second estimate of third quarter GDP was 33.1% annualized growth, matching the first estimate. On the negative side, the consumer confidence index in November fell as a resurgence in Covid-19 cases increased uncertainty and clouded the economic outlook and weekly jobless claims increased to 778,000 from 742,000 a week ago.
For the week, the Dow Jones Industrial Average rose 2.2% to close at 29,910 while the S&P 500 Index gained 2.3% to close at 3,638. The Nasdaq Composite Index jumped 3.0% to close at 12,205.
The employment report for November is expected to show that about 425,000 new jobs were created and that the unemployment rate fell to 6.8% from 6.9% in October. Both the ISM manufacturing and non-manufacturing or services sector Purchasing Managers’ Indexes (PMI) for November are expected to be above 55, solid readings that denote continued expansion. Construction spending for October is also expected to be fairly strong.
The Federal Reserve releases its Beige Book, which summarizes the current economic conditions in the twelve Fed districts and Fed Chairman Jerome Powell testifies before the Senate Banking Committee in Congress about the Cares Act.
Among the most prominent companies scheduled to report third quarter earnings are Zoom Video Communications, Hewlett Packard Enterprise, Salesforce, CrowdStrike Holdings, Royal Bank of Canada, Bank of Montreal, Dollar General, Kroger, Ulta Beauty and Land’s End.
In recent years, foreign stocks have lagged behind their U.S. counterparts and that trend is likely to continue this year. Through the close of business on Friday, the S&P 500 has posted a total return of 14.5% while the FTSE Global All Cap ex. U.S. Index has risen just 6.1%. But the nascent global economic recovery from the pandemic could favor international stocks as they are much cheaper than their U.S. counterparts. To ignore investment opportunities overseas could be a mistake as the U.S. stock market only comprises about 43% of the world’s total market capitalization. Although coronavirus cases are still rising in the U.S. and Europe, the European Union was able to pass a massive stimulus package that benefited their economy and provided stability in the region. Many Asian countries have also been more successful in containing the virus and, as a result, their economies are almost back to normal. While tensions between the U.S. and China are likely to continue, the new administration in Washington might put in place a more predictable trade policy which would eliminate some of the uncertainty that has weighed on global stocks. The ballooning Federal budget deficit could also have implications for the U.S. dollar and make it weaker. A weaker dollar makes foreign stocks more valuable for investors that own international positions in unhedged mutual funds. The biggest risk for global markets continues to be the path of the coronavirus, but long-term investors would be wise to include an allocation to international stocks to complement a well-balanced, diversified domestic portfolio.