Boom
A month after the announcement of the first highly effective COVID-19 vaccine, positive momentum is building. Potentially game-changing vaccines, a new round of government spending, and continued, pedal-to-the-metal monetary policy are nurturing a boom environment as we end a most challenging year.
While COVID-19 cases grow globally, and in the wake of the election, it is easy to lose track of market trends. In no particular order, here are a set of observations about recent trends worth noting.
Observations:
- The value of all U.S. stocks is nearing $42 trillion, or 2 times the whole economy’s size ($21 trillion GDP).
- High risk is running rings around safety. The highest risk stocks in the S&P 500 are up 26% in the past month, while the safest stocks were up 2% (based on the S&P 500 High and Low Beta Indices). Meanwhile, long-term Treasury bonds and gold are down 1% and 6%, respectively.
- Equity analysts are racing to increase their earnings forecasts. Analysts expect $165 of S&P 500 profits over the next 12-months, up from $140 last spring. The $165 figure is still short of the pre-COVID level of $180. Nevertheless, if the current pace continues, full recovery by winter’s end seems likely.
- The yield curve is steepening, pointing to a growth pickup ahead. The yield spread between the 10-year U.S. Treasury and a 3-month T-Bill rose to +90 basis points (+0.9%) last week. Last February, the spread was negative -25 basis points (-0.25%).
- Corporate credit spreads, an indicator of market worry over defaults, tightened to 240 basis points (2.4%) for Baa-rated corporate bonds over U.S. Treasury bonds recently. Sectors such as travel, which suffered most in 2020, are seeing large jumps in bond prices.
- Inflation expectations are heating up. The long-run inflation rate priced into Treasury Inflation-Protected Securities (TIPS) is near 2%, above 1.7% levels pre-COVID.
- Industrial metals prices are surging, rising 13% in November alone and up over 50% from March. The increase likely reflects pent-up demand and shortages in early-stage production processes.
- The U.S. dollar continues to weaken. The dollar index is down about 10% against most major currencies as global investors assess prospects for new fiscal spending, deficits, and ongoing monetary easing.
While these facts, in normal times, would call for the winding down of stimulative policies, there is no such move afoot today.
Final Thoughts
These observations paint a picture vastly different from a few months ago. While COVID-19 cases are rising, markets remain forward-looking, and are seeing better things ahead. In some ways, a boom mentality may be emerging as COVID-19 vaccines are rolled out, new fiscal measures are likely to be enacted, and central banks keep their foot on the gas.
We do worry that, at some point, high stock and bond valuations could assert themselves, putting downward pressure on asset prices. Historically low interest rates, coupled with high stock valuations — particularly among high growth / high momentum market segments — could come back to haunt investors. Unwinding ultra-accommodative policies and reconciling high valuations are likely to be challenging issues in 2021-2022.
For now, the path of least resistance is up, and markets are booming. And with good cause. Promising vaccines for COVID-19 are expected to be deployed very soon. Highly effective and rapidly developed vaccines have the potential to thwart a significant threat to the global economy. There is more work ahead, but markets say that we appear to be on the right track.
Kevin R. Caron, CFA
Senior Portfolio Manager
973-549-4051
Chad Morganlander
Senior Portfolio Manager
973-549-4052
Matthew Battipaglia
Portfolio Manager
973-549-4047
Steve Lerit, CFA
Senior Risk Manager
973-549-4028
Tom Serzan
Analyst
973-549-4335
Suzanne Ashley
Internal Relationship Manager
973-549-4168
Eric Needham
Director, External Sales and Marketing
312-771-6010
Jeffrey Battipaglia
Client Portfolio Manager
973-549-4031
Disclosures
The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecast in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, and you cannot invest directly in an index.
Asset allocation and diversification do not ensure a profit and may not protect against loss. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility. Small-company stocks are typically more volatile and carry additional risks since smaller companies generally are not as well established as larger companies. Property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. High-yield bonds have greater credit risk than higher-quality bonds. Bond laddering does not assure a profit or protect against loss in a declining market. The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments.
All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. It is important to review your investment objectives, risk tolerance, and liquidity needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks, among other factors to varying degrees. Fixed Income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks, among other factors to varying degrees.
This commentary often expresses opinions about the direction of market, investment sector, and other trends. The opinions should not be considered predictions of future results. The information contained in this report is based on sources believed to be reliable, but is not guaranteed and not necessarily complete.
The securities discussed in this material were selected due to recent changes in the strategies. This selection criterion is not based on any measurement of performance of the underlying security.
Washington Crossing Advisors, LLC is a wholly-owned subsidiary and affiliated SEC Registered Investment Adviser of Stifel Financial Corp (NYSE: SF). Registration with the SEC implies no level of sophistication in investment management.
S&P 500 — The Standard & Poor’s 500 Index is a capitalization-weighted index that is generally considered representative of the U.S. large capitalization market.
The S&P 500 High Beta Index measures the performance of 100 constituents in the S&P 500 that are most sensitive to changes in the market. Constituents are weighted relative to their level of market sensitivity, with each stock assigned a weight proportional to its beta.
The S&P 500 Low Volatility Index measures performance of the 100 least volatile stocks in the S&P 500. The index benchmarks low volatility or low variance strategies for the U.S. stock market. Constituents are weighted relative to the inverse of their corresponding volatility, with the least volatile stocks receiving the highest weights.
Disclosures
The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecast in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, and you cannot invest directly in an index.
Asset allocation and diversification do not ensure a profit and may not protect against loss. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility. Small-company stocks are typically more volatile and carry additional risks since smaller companies generally are not as well established as larger companies. Property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. High-yield bonds have greater credit risk than higher-quality bonds. Bond laddering does not assure a profit or protect against loss in a declining market. The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments.
All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. It is important to review your investment objectives, risk tolerance, and liquidity needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks, among other factors to varying degrees. Fixed Income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks, among other factors to varying degrees.
This commentary often expresses opinions about the direction of market, investment sector, and other trends. The opinions should not be considered predictions of future results. The information contained in this report is based on sources believed to be reliable, but is not guaranteed and not necessarily complete.
The securities discussed in this material were selected due to recent changes in the strategies. This selection criterion is not based on any measurement of performance of the underlying security.
Washington Crossing Advisors, LLC is a wholly-owned subsidiary and affiliated SEC Registered Investment Adviser of Stifel Financial Corp (NYSE: SF). Registration with the SEC implies no level of sophistication in investment management.
