November was another month for the record books in what has been a record-book-filling year. Since 1990, a period that consists of 371 months, there have been only nine +/- 10% moves in the S&P 500 - a rare event. November 2020 was the most recent such event, but 2020 also produced two others (March and April).
|+/- 10% Monthly Moves in the S&P 500 since 1990
There are many factors that have combined to push the equity markets to new records. We'll discuss a few here, including: encouraging vaccine news, societal behavior changes, and Presidential Election results.
On November 9th and 16th Pfizer and Moderna released independent results that the effectiveness of their vaccines across test groups was 90% and 94%, respectively. In both cases, the market responded positively to the psychological benefit of eminent vaccine distribution and the continued development of better and better therapeutics to assist people diagnosed with the virus.
As we've seen and said before, the markets love to overdo things in both directions. For the first time since the start of the pandemic, previously out-of-favor "reopening" names in industries such as retail, airlines and cruise lines surged while the "stay at home" trade slowed, giving up some ground.
But it is hard to imagine the US and global economies returning to "normal" just because of a vaccine. Domestic air travel is still off more than 65% and cruise lines may not effectively return to pre-pandemic demand for years, vaccine or not. Important industries like restaurants, hospitality, leisure/lifestyle and social and entertainment mainstays (e.g., live music, sporting events, conventions, weddings, graduations, holiday parties, etc.) have been significantly curtailed for months.
One hurdle to a full reopening of the economy is the number of Americans who say they have no intention of taking the vaccine. In recent months that number has grown with polls indicating that only 50% of individuals over 65 years of age state they would take a vaccine. And, probably no surprise, the numbers by political party are even more divisive with an October 17th report showing that 56%, 37% and 33% of Democrats, Independents and Republicans say they are willing to receive the vaccine, respectively.
Societal Behavior Changes
We believe behaviors have been permanently changed by our shared pandemic experience. While some individuals will once again be excited to travel, cruise, dine-out and attend a movie or Broadway play, others will not even consider these "close-contact" activities.
Major employers have stated that millions of their "office" employees have transitioned to full-time remote work. This shift in paradigm will affect everything from public transportation to city-center economies, from the health and beauty industry to clothing and textiles.
Companies that make athletic leisure products like Nike and Lululemon have surged as Americans ditch business formal wear for more comfortable work-from-home attire. Moreover, work-from-home arrangements eliminate the expense and/or wasted time of commuting, dry cleaning, personal grooming, and the habitual morning Starbucks stop.
Technology adoption has accelerated in mere months what might originally have taken a decade. Millions of individuals have made Zoom, PayPal, and DocuSign part of their daily life. We have also likely seen a permanent change in shopping habits as Amazon, Target, Walmart, local grocers, and even specific retailers like Chewy are establishing a new "norm" of curbside pickup or home delivery.
While there are many positive signs -- we remain cautious as State lockdowns have accelerated in the last several days and the psychological effect of canceling Thanksgiving and Christmas gatherings may have an adverse effect on consumer sentiment and mental health in general. Pandemic fatigue, you know!
Presidential Election Results
The direction of the market since the election seems to indicate that investors feel confident in the national election outcome - particularly with an apparent balance of power. That conviction may be higher and the rally extended when we have a definitive result in the Senate. The two Georgia Senate seats remain unresolved due to runoff election requirements. If both seats go Republican, or there is a split, then Republicans will retain control of the Senate, providing a balance of power in Washington DC. A Democratic sweep in Georgia would fast track cabinet member approval, set the stage for an era of Democratic dominance in our nation's capital, and provide a potential runway for Democratic initiatives (e.g., higher taxes, expanding the supreme court, possible addition of Puerto Rico and Washington DC as states, etc.).
As we've outlined in previous White Papers, history shows that markets prefer a balance of power or political gridlock to single party control. In the end, we think a split in the Georgia Senate races is the most likely outcome, allowing the equity markets to breathe a sigh of relief, and ultimately pushing the equity markets further into record territory in Q1 2021.
We also expect the new Biden administration, in an effort to get off on the right foot with the American public, to implement substantial economic and fiscal stimulus throughout 2021. That, coupled with low interest rates, has typically been a very bullish catalyst for the equity markets.
We certainly didn't have all the answers all the time, but we have been more often right than wrong. We constantly push ourselves to learn from every new experience so that we are best prepared and have a plan in place for each of our client's accounts - no matter the market environment.
We would like to thank you, our incredible clients, for your continued trust, faith and support in what has been the most challenging investment year since 2008 and 2009. Let's all raise a glass in hopes that 2021 will be a far different year than 2020.
Happy Holidays and Happy New Year!