For the week ending, stocks pushed higher into record territory after finishing November with gains last seen in 1987 for the Dow Jones and 1978 for the Russell 2000 index. The TSX gained 0.7% for the week, S&P 1.7%, EAFE 0.8%, Nasdaq 2.12% and the Russell 2000 1.94%. Notably, major oil producers and OPEC reached an agreement to slow output cuts, giving a boost to energy stocks. The Canadian loonie responded, reaching a two-and-a-half-year high against the US dollar. In the last couple of months, the performance of the broader-based Russell 2000, rising to 13.86% year to date, is an encouraging sign market breadth is strengthening. Value stocks and dividend-growing stocks continue to participate in the recent bounce, previously driven by just a handful of “stay-at-home” tech names. A broader-based market rally is usually an indication of a more sustainable market move.
Vaccine news early in the week from Pfizer and its European partner BioNTech seeking emergency EU approval along with news on Wednesday that the UK had approved distribution of a vaccine increased investor optimism. Later in the week, Pfizer’s statement that supply chain difficulties would slow vaccine production dampened enthusiasm temporarily. In the US, hopes for a bipartisan relief package indicated that both sides are willing to talk, but a final agreement appears elusive. Investors appear to be looking through the second wave of the virus and looking to the more reinflationary and cyclical recovery plays.
Recent economic news, however, is less supportive. The job numbers are the latest indication of a slowing recovery. In Canada, 62,000 new jobs were created in the latest period, bringing the employment rate to 8.5% from 9%, while in the US, the October nonfarm payrolls came in at 245,000 — about half of what was estimated and the slowest job growth since May. The unemployment rate in the US dropped to 6.7% but is more of a reflection of a falling participation rate. On Tuesday, the Supply Management released its latest data showing US manufacturing expanding at a slower pace in November after the strongest reading in two-and-a-half years as orders, employment and production slowed. The factory activity gauge slumped 1.8 points to 57.5, which falls below the Bloomberg estimate survey of economists at 58 but still above 50, which indicates growth. Manufacturing activity in the US, despite the recent data, is still well above pre-pandemic levels and points to steady demand and lean inventories. Challenges of supply chain disruptions, factory re-configuring for social distancing, sanitizing stations, absenteeism and shutdowns are just a few of the difficulties facing a recovering manufacturing sector. Rising COVID infection rates and increasing restrictions limiting normal activity are not supportive and will continue to provide a headwind to the return to normal.
As mentioned above, November equity indices performance was one of the strongest on record. Historically, following such strength, markets tend to move higher over the next year. Not necessarily without a correction but historically higher. The question is, how is the market to move higher when the fundamentals are not all that supportive to propel the advance? Investor optimism is looking past the second wave of the virus and will re-position and re-balance capital in anticipation of a return to normal. So, one answer is fund flows. We have seen a top in bonds, and recently rates have started to push higher ever so slowly. Capital is moving into the reflationary trade, and with the renewed optimism, investors are willing to take on more risk. Interest in the emerging markets and Asia are confirming this trend.
With all the potential uncertainty and challenges facing the recovery, we are cautiously optimistic moving into 2021.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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