December 4 2020 Market Update
Markets Surge Past Uncertainty
November brought a new surge in COVID-19 caseloads and the possibility of further government shutdowns (at this writing, on December 3rd, a new stay-at-home order went into effect in California).1
This brings a renewed level of uncertainty to the economic recovery, especially when combined with expiring federal unemployment benefits and the absence of additional stimulus. Despite positive news around potential vaccine approvals and availability,2 we still face a number of unknowns going into year-end and 2021.
Despite this backdrop, markets surged in November. The Dow Jones Industrial Average had its best month since 1987, rising 12% to hit 30,000 for the first time in history, while the S&P 500 rose 11%.3
There’s a lot to understand here, so let’s take it one issue at a time.
Why Are Markets Doing So Well?
One question that comes up a lot is why markets are doing well when uncertainty and risk is so pronounced in the overall economy.
You’ve probably heard this before, but it’s always good to keep in mind that the market is not the same as the current status of the economy. While it’s easy to think of markets as a barometer for the overall health of the country, it’s just not that simple. The makeup of the S&P 500 is significantly different than the makeup of the overall economy. We’ve covered the proportion of technology in the S&P 500 before, and that difference between the S&P 500 and the overall economy is significant here as well.
Another important note to keep in mind: volatility can go both up or down. These types of significant moves – in either direction, as we saw in March – can be reversed, sometimes at surprising speed. Historically, this tends to favor investors over longer periods, which is especially important to keep in mind during periods with sharp drops.4
At this time, the market appears to be looking ahead to the potential for vaccine approval and distribution. The news here is, so far, promising. The Food and Drug Administration (FDA) is currently scheduled to meet on December 10th to discuss the merits of the Pfizer/BioNTech vaccine, which has just been approved for distribution in the United Kingdom.5
To that end, we could see a continued run upwards. However, if the news or sentiment turn, or if issues with a vaccine or other delays arise, we could see the reverse.
The Incoming Biden Administration
We’ll see another set of new variables come January, with the inauguration of President-elect Joe Biden and the Georgia runoff for control of the Senate. Outside of the usual handicapping of legislative outcomes, these two events could carry significant implications when it comes to federal support for the economy.
Currently, there are some movements in Congress to provide stimulus by year-end,6 but given the start-stop progress of these discussions so far, we don’t think we can count on it yet.
On the other hand, if majority control of the Senate shifts to Democrats in January, we could see a significantly boosted level of federal stimulus in future legislation. Even if the status quo is maintained, we believe it’s likely that president-elect Joe Biden’s economic team is likely to push for expanded economic support, particularly for low and middle-class workers.7
What Does This Mean For You?
We all want the pandemic to be over, but at this time it’s apparent that we’re not through it yet. With caseloads jumping across the US and Europe, the probability of shutdowns and economic fallout are also rising. At the same time, while volatility favored investors in November, we are still facing enough uncertainty that we would not discount the possibility of a reversal in the next few months.
That said, the vaccine news is incredibly positive, not only for sentiment and morale but also for the economy. If we can see widespread distribution and adoption of the vaccine, we could see some return to normalcy hopefully in the next year.
This year has undoubtedly been a wild and difficult ride for everyone. In our view, the pandemic will continue to require patience and discipline from investors. We strongly advise staying aligned with your investment strategy because, as November showed us, the turn of the market is not predictable. Your long-term strategy accounts for that, but emotional investing does not.
Please do not hesitate to reach out to us with your questions and concerns: so often, it’s not just about the portfolio value or the index numbers. It’s about the sense of what our money can help us through and shelter us from, and we’re here to talk through those issues as well as your strategic plan.
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4: JP Morgan Guide to the Markets, as of November 30, 2020.
Performance table sources: