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Sightline Weekly Market Update: Market Movement Following Elections

Equity markets climbed to record highs in a chaotic week with the Georgia state Senate runoff elections and the electoral college count in Congress. With Democrats now controlling Congress and the presidency, it is anticipated Congress will increase fiscal stimulus to aid the recovery. The TSX gained 2.93%, S&P 1.83%, Nasdaq 2.43% and the broader-based S&P 400 and Russell 2000 both jumped 4.62% and 5.75% in the week. Europe also joined the party and shrugged off a fresh round of lockdowns on expectations of an economic recovery as vaccinations become more widespread and stimulus from the US becomes more likely. Small caps outperformed large caps, and value outpaced growth. Energy led the S&P 500 when Saudi Arabia announced it would be reducing production by 1 million barrels per day. The 10-year US Treasury finished the week at 1.12%. The last time the yield was over 1% was nine months ago. Higher Treasury rates helped propel banks stocks, which benefit from higher yields improving lending margins.

The Institute of Supply and Management gauge of manufacturing came in at 60.7, the highest level since August 2018 and well above the November reading of 57.5 and expectations of 56.6.1 A reading above 50 indicates an expansion in manufacturing which accounts for over 11% of GDP and about 8.5% of the workforce.2 Difficulties with short-term shutdowns, absenteeism and sanitizing working environments are slowing the recovery process and putting a strain on growth in manufacturing capabilities. The recent non-farm payrolls released on Friday fell by 140,000 reflecting the most recent round of layoffs caused by lockdowns in the service sectors. The seasonally adjusted weekly initial jobless claims came in at 787,000 — a decrease of just 3,000 from the previous week. The seasonally adjusted unemployment rate stayed the same at 3.5%.3

Historically, after a presidential election, the markets in the US advance around 10%. When the Democrats hold the Congress and the presidency following a Republican, markets in the next year after an election are up an average of 14%. Is the current environment any different? Time will tell, as they say, but several factors are suggesting, as mentioned previously, a strong likelihood markets will advance. In the last couple of months of 2020, we noticed a slow, on-again, off-again rotation from value to growth and small cap advancing over large cap.  What the rotation to value and small cap indicates is increasing breadth in the market, which is required for a sustainable market advance. Strengthening earnings and attractive valuations relative to the high-flying technology sector may finally gain the attention of investors after several years of hiatus. With the economic recovery anticipated by year-end with expanding vaccination availability, the market is anticipating growing profits. The Fed has signaled its willingness to do whatever is necessary, and coupled with fiscal stimulus, which accompanies Democratic administration, the market could pick-up strength as the year progresses. The real problem is the frailty of the recovery. The Democratic agenda of higher corporate and individual taxes hopefully will be postponed until such time as the slack is taken out of the labor market. The real unemployment number, as calculated by Shadowstats4, is 26.3%. Even the U6 number, which includes unemployed, underemployed and discouraged workers, is well over 10% and is a far cry from the official number of 3.5% seasonally adjusted. The participation, while showing improvement from the downward spike earlier in the year, is still at 20-year lows.5

While it is acknowledged there are serious headwinds to economic recovery, the growth in the technology sectors, especially in the green and healthcare sectors, hopefully will cover up the usual unintended consequences of poor policy decisions of recently elected US government.

 

Sources:

1 https://tradingeconomics.com/united-states/business-confidence

2 https://www.google.com/search?client=firefox-b-d&q=what+does+manufacturing+represent+of+us+gpd

3 https://www.dol.gov/ui/data.pdf

4 http://www.shadowstats.com/alternate_data/unemployment-charts

5 https://www.bls.gov/charts/employment-situation/civilian-labor-force-participation-rate.htm

 

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors primarily through fee-based accounts.

Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.

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