07/06/2020
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Categories
Monthly Investment Update
Investors were rewarded in November as several stock indices provided double-digit monthly returns. Two stories in particular seemed to have driven the stock market surge; significant progress toward COVID-19 vaccinations and the diminishing uncertainty related to the US Presidential election outcome. The S&P 500 gained 11% during the month, with value stocks and more economically sensitive cyclical sectors outperforming the growth and technology-oriented names that led through much of the year. US large cap value stocks returned 14% and small cap and foreign equities returned 18% and 16%, respectively[1].
The election of Joe Biden as the next President of the United States became more certain during the month after an extended process of counting mail-in ballots in swing states as well as subsequent legal challenges from President Trump’s team. The Electoral College is set to meet and vote on December 14, marking the next step on the path to Inauguration Day.
In the race for a COVID-19 vaccine, three companies (Pfizer, Moderna, and AstraZeneca) have recently completed trials of their vaccines. The initial results surprised to the upside, as the Pfizer and Moderna vaccines reporting 95% efficacy, and those companies are expected to seek FDA emergency approval in the weeks to come. Markets applauded the news, hoping that life may return to pre-pandemic normal in 2021.
Source: Bloomberg
Despite progress toward a vaccine, the pandemic continues to rage on in the US. Late November and early December saw record numbers of new cases and hospitalizations, with hospital systems in some states nearing bed capacity.
For many, it is increasingly difficult to process the sharp contrast between how grim the real-life situation is today versus the optimism surrounding the upcoming distribution of a vaccine. Assuming the vaccines prove effective and the logistical challenges with distribution can be solved, the light at the end of the tunnel appears to be getting closer.
Corporate Earnings
Third quarter earnings for the S&P 500 generally beat expectations, with more than 85% of companies outperforming analysts’ consensus estimates, and earnings were nearly 20% above expectations, on average[2]. Looking forward, the expectation is for the S&P 500 to earn approximately $169 per share in 2021, which would mark a 22% increase in earnings over 2020 and a 4% increase in 2019 earnings that occurred prior to the pandemic. As of November 30, the S&P 500 index level was 3,622, which implies that investors are paying 21x next year’s expected earnings.
US Economy
In early December, U.S. Bureau of Labor Statistics released the November employment report. Economists were anticipating that the US economy added approximately 450,000 jobs during the month, but the actual number was only 245,000. The total number of those employed in the US remains significantly below the pre-pandemic peak in January of 2020. The headline unemployment rate remained relatively unchanged at 6.8%, but the total unemployment rate (when accounting for those who are part-time for economic reasons) was more than 12% of the labor force as of November. These levels are nearly twice as high as those from January, though significantly lower than the nearly 23% rate at the height of the stay-at-home orders in April.
Implications for Portfolio Management
The chart below highlights the valuation of large cap US equities as measured by the S&P 500 index, which may be moderately overextended relative to historical averages. Today, markets are at a potential inflection point with economic and human suffering from the pandemic juxtaposed against the prospect for a cure on the horizon as well as significant levels of fiscal and monetary stimulus.
Given the unprecedented nature of the current situation, many traditional measures of valuation may not be as meaningful in an extended environment of zero interest rates. Market participants seem to be looking beyond 2020 earnings and are willing to pay a higher multiple for growth in the recovery years.
Source: JPMorgan
Asset Class Returns
Prices & Interest Rates
[1] Russell 1000 Value Index, Russell 2000 Index, and MSCI EAFE Index, respectively.
[2] Source: FactSet
Past performance may not be representative of future results. All investments are subject to loss. Forecasts regarding the market or economy are subject to a wide range of possible outcomes. The views presented in this market update may prove to be inaccurate for a variety of factors. These views are as of the date listed above and are subject to change based on changes in fundamental economic or market-related data. Please contact your Financial Advisor in order to complete an updated risk assessment to ensure that your investment allocation is appropriate.
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Categories”}},{“type”:”list_item”,”source”:{“query”:{“name”:”categories.customCategories”,”arguments”:{“id”:0,”offset”:0,”limit”:10,”order”:”term_order”,”order_direction”:”ASC”}},”props”:{“content”:{“name”:”name”,”filters”:{“search”:””}},”link”:{“name”:”link”,”filters”:{“search”:””}}}}}],”name”:”Blog Category List”}]},{“name”:””,”type”:”column”,”props”:{“image_position”:”center-center”,”media_overlay_gradient”:””,”width_small”:”2-3″},”children”:[{“name”:””,”type”:”headline”,”props”:{“title_element”:”h1″,”item_maxwidth”:”large”,”content”:”Monthly Investment Update”},”source”:{“query”:{“name”:””},”props”:{}}},{“name”:””,”type”:”text”,”props”:{“margin”:”default”,”column_breakpoint”:”m”,”content”:”
Investors were rewarded in November as several stock indices provided double-digit monthly returns.\u00a0 Two stories in particular seemed to have driven the stock market surge; significant progress toward COVID-19 vaccinations and the diminishing uncertainty related to the US Presidential election outcome.\u00a0 The S&P 500 gained 11% during the month, with value stocks and more economically sensitive cyclical sectors outperforming the growth and technology-oriented names that led through much of the year.\u00a0 US large cap value stocks returned 14% and small cap and foreign equities returned 18% and 16%, respectively[1].\u00a0\n
The election of Joe Biden as the next President of the United States became more certain during the month after an extended process of counting mail-in ballots in swing states as well as subsequent legal challenges from President Trump\u2019s team. \u00a0The Electoral College is set to meet and vote on December 14, marking the next step on the path to Inauguration Day.\n
In the race for a COVID-19 vaccine, three companies (Pfizer, Moderna, and AstraZeneca) have recently completed trials of their vaccines.\u00a0 The initial results surprised to the upside, as the Pfizer and Moderna vaccines reporting 95% efficacy, and those companies are expected to seek FDA emergency approval in the weeks to come.\u00a0 Markets applauded the news, hoping that life may return to pre-pandemic normal in 2021.”},”source”:{“query”:{“name”:””},”props”:{}}},{“type”:”image”,”props”:{“margin”:”default”,”image_svg_color”:”emphasis”,”image”:”wp-content\/uploads\/2020\/12\/Dec.-2020-When-to-Expect-the-Next-Vaccine.png”}},{“type”:”text”,”props”:{“margin”:”default”,”column_breakpoint”:”m”,”text_size”:”small”,”content”:”
Source: Bloomberg”}},{“name”:””,”type”:”text”,”props”:{“margin”:”default”,”column_breakpoint”:”m”,”content”:”
Despite progress toward a vaccine, the pandemic continues to rage on in the US.\u00a0 Late November and early December saw record numbers of new cases and hospitalizations, with hospital systems in some states nearing bed capacity.\u00a0\n
For many, it is increasingly difficult to process the sharp contrast between how grim the real-life situation is today versus the optimism surrounding the upcoming distribution of a vaccine.\u00a0 Assuming the vaccines prove effective and the logistical challenges with distribution can be solved, the light at the end of the tunnel appears to be getting closer.\u00a0″},”source”:{“query”:{“name”:””},”props”:{}}},{“type”:”image”,”props”:{“margin”:”default”,”image_svg_color”:”emphasis”,”image”:”wp-content\/uploads\/2020\/12\/Dec-2020-Nationwide-COVID-19-Metrics-7-day-average-lines.png”}},{“name”:””,”type”:”text”,”props”:{“margin”:”default”,”column_breakpoint”:”m”,”content”:”
\u00a0\n
Corporate Earnings”,”text_size”:”large”,”text_color”:”primary”},”source”:{“query”:{“name”:””},”props”:{}}},{“name”:””,”type”:”text”,”props”:{“margin”:”default”,”column_breakpoint”:”m”,”content”:”
Third quarter earnings for the S&P 500 generally beat expectations, with more than 85% of companies outperforming analysts\u2019 consensus estimates, and earnings were nearly 20% above expectations, on average[2].\u00a0 Looking forward, the expectation is for the S&P 500 to earn approximately $169 per share in 2021, which would mark a 22% increase in earnings over 2020 and a 4% increase in 2019 earnings that occurred prior to the pandemic.\u00a0 As of November 30, the S&P 500 index level was 3,622, which implies that investors are paying 21x next year\u2019s expected earnings.”},”source”:{“query”:{“name”:””},”props”:{}}},{“type”:”image”,”props”:{“margin”:”default”,”image_svg_color”:”emphasis”,”image”:”wp-content\/uploads\/2020\/12\/Dec-2020-SP-500-Calendar-Year-Bottom-Up-EPS-Actuals-Estimates.png”}},{“name”:””,”type”:”text”,”props”:{“margin”:”default”,”column_breakpoint”:”m”,”content”:”
\u00a0\n
US Economy”,”text_size”:”large”,”text_color”:”primary”},”source”:{“query”:{“name”:””},”props”:{}}},{“name”:””,”type”:”text”,”props”:{“margin”:”default”,”column_breakpoint”:”m”,”content”:”
In early December, U.S. Bureau of Labor Statistics released the November employment report.\u00a0 Economists were anticipating that the US economy added approximately 450,000 jobs during the month, but the actual number was only 245,000.\u00a0 The total number of those employed in the US remains significantly below the pre-pandemic peak in January of 2020.\u00a0 The headline unemployment rate remained relatively unchanged at 6.8%, but the total unemployment rate (when accounting for those who are part-time for economic reasons) was more than 12% of the labor force as of November. These levels are nearly twice as high as those from January, though significantly lower than the nearly 23% rate at the height of the stay-at-home orders in April.”},”source”:{“query”:{“name”:””},”props”:{}}},{“type”:”image”,”props”:{“margin”:”default”,”image_svg_color”:”emphasis”,”image”:”wp-content\/uploads\/2020\/12\/Dec-2020-Total-Non-Farm-Payrolls-Millions.png”}},{“name”:””,”type”:”text”,”props”:{“margin”:”default”,”column_breakpoint”:”m”,”content”:”
\u00a0\n
Implications for Portfolio Management”,”text_size”:”large”,”text_color”:”primary”},”source”:{“query”:{“name”:””},”props”:{}}},{“name”:””,”type”:”text”,”props”:{“margin”:”default”,”column_breakpoint”:”m”,”content”:”
The chart below highlights the valuation of large cap US equities as measured by the S&P 500 index, which may be moderately overextended relative to historical averages.\u00a0 Today, markets are at a potential inflection point with economic and human suffering from the pandemic juxtaposed against the prospect for a cure on the horizon as well as significant levels of fiscal and monetary stimulus.\u00a0\n
Given the unprecedented nature of the current situation, many traditional measures of valuation may not be as meaningful in an extended environment of zero interest rates.\u00a0 Market participants seem to be looking beyond 2020 earnings and are willing to pay a higher multiple for growth in the recovery years.\u00a0″},”source”:{“query”:{“name”:””},”props”:{}}},{“type”:”image”,”props”:{“margin”:”default”,”image_svg_color”:”emphasis”,”image”:”wp-content\/uploads\/2020\/12\/SP-500-Index-Valuation.png”}},{“type”:”text”,”props”:{“margin”:”default”,”column_breakpoint”:”m”,”text_size”:”small”,”content”:”
Source: JPMorgan”}},{“type”:”text”,”props”:{“margin”:”default”,”column_breakpoint”:”m”,”content”:”
Asset Class Returns”}},{“type”:”image”,”props”:{“margin”:”default”,”image_svg_color”:”emphasis”,”image”:”wp-content\/uploads\/2020\/12\/Dec-2020-Asset-Class-Returns.png”}},{“type”:”text”,”props”:{“margin”:”default”,”column_breakpoint”:”m”,”content”:”
Prices & Interest Rates”}},{“type”:”image”,”props”:{“margin”:”default”,”image_svg_color”:”emphasis”,”image”:”wp-content\/uploads\/2020\/12\/Dec-2020-Prices-Interest-Rates-1.png”}},{“type”:”text”,”props”:{“margin”:”default”,”column_breakpoint”:”m”,”text_size”:”small”,”content”:”
\u00a0\n
[1] Russell 1000 Value Index, Russell 2000 Index, and MSCI EAFE Index, respectively.\n
[2] Source: FactSet”}}]}]}]},{“name”:”Disclaimer”,”type”:”section”,”props”:{“style”:”muted”,”width”:”default”,”vertical_align”:”middle”,”title_position”:”top-left”,”title_rotation”:”left”,”title_breakpoint”:”xl”,”image_position”:”center-center”,”animation_delay”:false},”children”:[{“name”:””,”type”:”row”,”props”:{“column_gap”:”large”,”row_gap”:”large”},”children”:[{“name”:””,”type”:”column”,”props”:{“image_position”:”center-center”,”media_overlay_gradient”:””,”width_medium”:”1-1″},”children”:[{“name”:””,”type”:”text”,”props”:{“margin”:””,”column_breakpoint”:”m”,”content”:”
Past performance may not be representative of future results. \u202fAll investments are subject to loss.\u202f Forecasts regarding the market or economy are subject to a wide range of possible outcomes. \u202fThe views presented in this market update may prove to be inaccurate for a variety of factors.\u202f These views are as of the date listed above and are subject to change based on changes in fundamental economic or market-related data. \u202fPlease contact your Financial Advisor in order to complete an updated risk assessment to ensure that your investment allocation is appropriate.\u202f\u202f\u00a0″,”text_align”:”left”,”text_size”:”small”,”text_color”:”muted”}}]}]}]}],”version”:”2.2.2″} –>