It seems hard to believe that, as of this writing, there are only 48 days left to the year 2020. Even harder to believe is that, at the start of the year 317 days ago, very few people in this country had even heard about COVID-19. If the adage is true that “time flies when you’re having fun”, it’s no wonder that this year time seems to have almost crawled to a halt. These really are crazy times.
The U.S. stock market continues ratchet ever higher despite all the general craziness, buoyed recently by some good news about Pfizer’s COVID-19 vaccine. Also helping the market is the prospect of a divided Congress, with Republicans likely retaining control of the Senate. Since 1933, markets have performed best with a split Congress:
As we wrote about last month on the Coyle blog (Click Here), there are several reasons for investor optimism. We also noted that the market performance continued to be dominated by a handful of large-cap growth stocks. While that is still generally this year, we have noticed some interesting trends developing.
First, the large-cap growth leadership has taken a bit of a breather, off 1.9% over the past month, while value stocks have put up some positive gains:
Source: YCharts, Inc. as of 11/12/20
Those recent large-cap losses hit the consumer cyclical and technology sectors, while the energy, financials and industrial sectors (mostly value stocks) may be starting to show some life:
Source: YCharts, Inc. as of 11/12/20
Perhaps investors are starting to back off from the perceived safety of the pricey large tech stocks and are starting to see value in other areas of the market, which is another way of saying that investors are looking ahead to a successful vaccine rollout.
Second, in addition to the recent uptick in value stocks, we see small and mid-cap stocks showing some positive relative performance. Since this year’s market low on March 23, the Russell 2000 Index of small cap stocks has outperformed both the S&P 500 Index (by 14%) and the NASDAQ Composite Index (by 5%).
Third, while U.S. stocks have led the rest of world this year, non-U.S. equities have now turned positive, led by Asia Pacific and Emerging Markets:
European stocks are still negative for the year, however, as investors there are now worried about the health of the European banks, who may be facing very large loan write-offs, especially with a second wave of COVID-19 infections hitting the continent.
It’s probably too early to suggest that the long-awaited stock market rotations from growth to value and from large-cap to small-cap has finally begun in earnest, but there are signs that maybe a shift is beginning. Stock market optimism is notorious fickle, however, and the brief episodes noted above should not be construed as a significant change in sentiment.
Investors always have to deal with uncertainty in their views of the future, and today is certainly no different. As John Authers wrote recently, “There are plenty of things that could still go wrong. The vaccine needs to get to people, and the world economy needs to keep above stall speed during what could be a dark winter. The economy needs to revive in time to save the many businesses, particularly in real estate, that appear to be at risk of default.” One headwind facing us now is the recent dramatic increase in COVID-19 cases, with new daily infections and hospitalizations hitting records in the U.S. We also don’t know when or how big the next round of fiscal stimulus will get approved in Washington. Unemployment remains high, as does continuing claims for unemployment benefits.
While we wait for some semblance of normalcy to return to our lives, what should investors do? At Coyle Financial, our counsel is to stay the course and focus on the long-term. We like what blogger and investment manager Ben Carlson, CFA, wrote recently:
“It’s easy to tell people to focus exclusively on the long-term when it comes to their investments but as Daniel Kahneman said at his Nobel Prize acceptance speech a number of years ago, “the long-term is not where life is lived.” The long-term is just the accumulation of a bunch of short-terms.
This doesn’t mean you have to react to the short-term movements of the markets but completely ignoring them probably isn’t realistic either.
Balancing the fact that bad things can happen in the short-run while wonderful things can be accomplished over the long-run is one of the hardest parts about keeping your sanity as an investor.”
The team here at Coyle Financial couldn’t agree more.
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