Daily Global Perspectives

The spectacular returns delivered by equity markets in November were marked by a shift in leadership from large, growth and defensive market segments to smaller, value and cyclical segments. The MSCI EAFE index, which compared to the S&P 500 has a larger weight in the value-based financial sector, had an especially good month. The developed international equity benchmark outperformed its U.S. counterpart by 4.55%; the most since May of 2009, when many believed the euro was on its way to challenging the U.S. dollar’s (USD) supremacy as the world’s reserve currency. The European debt crisis, which began at the end of 2009, swiftly obliterated that notion and set off what would become a decade-long trend toward a stronger USD.

Equity investors have much to be thankful for this month, with U.S. small cap stocks up nearly 20% MTD. Global stocks have quickly moved from flat to outsized returns for the year. YTD total returns for the MSCI ACWI and S&P 500 indexes are now 9.9% and 12.6%, respectively. This remarkable price action seems to be largely due to the trimming of two big tail risks that have been overhanging the market for most of this year: 1) the coronavirus pandemic and 2) the 2020 elections.

Is the market too dependent on the Federal Reserve? The Fed continues its triage, aka massive stimulus, long after the patient is on the road to recovery. In order to keep credit flowing, the Fed created an “artificial floor” for bond prices including for “zombie” companies with severely impaired top-line revenues and bottom-line corporate profits. This has encouraged ever more risk-taking in an economy where the business traveler is absent – think airlines, hotels, car rentals, restaurants and the entire energy industry. This impact, using the price-earnings ratio (P/E), is that investors get rewarded with a lot of P and no E.

The daily number of confirmed COVID-19 cases in the United States has increased to more than 150,000, almost five times the April peak and more than double the summer peak. The reproductive rate, a key measure of how fast the virus is growing, is above 1.0 for almost every state in the country,¹ indicating a quickening spread. COVID related hospitalizations continues to set new highs, daily deaths are back near summer highs (less than half of April peaks) and leading experts warn that the situation will likely get worse before it gets better. Only seven states, however, are estimated to have reached ICU capacity of more than 70%; only Georgia is at slightly more than 80%.²

Year-to-date, the S&P 500 has delivered a total return of 12.4%,¹ which is more than the roughly 10% average return since the index’s inception in 1926. Most other major equity markets are also higher on the year, albeit with substantial dispersion. This all comes amidst a global pandemic that has caused the sharpest U.S. recession in recorded history, while COVID-19 infections and hospitalizations continue to rise past previous peaks; and the incumbent U.S. president, who has a history of unpredictable behavior, is contesting the results of the recent election.

Monday’s announcement that Pfizer and BioNTech’s COVID-19 vaccine candidate achieved an efficacy rate above 90% in interim analysis from their Phase 3 study is great news. Not only does the vaccine appear to be unusually effective (most flu vaccines reduce risk of flu illness by 40‒60%¹), the sample size of patients was increased at the recommendation of the Food and Drug Administration, which increases confidence in the results. This should reassure people they can trust the vaccine when it comes time to take it. While there are several hurdles to manufacturing and distributing this particular vaccine, and more testing is required, this is an irrefutably good report that markedly improves the outlook for economic growth.

I am always amazed at how much the investment profession focuses on politics. Some managers even try to make a “Republican” portfolio and a “Democrat” portfolio, depending upon who wins. I think, truly they cannot be serious. This is my seventh presidential election as a money manager and not once have I ever factored in which party or policies I would try to game to get an advantage.  Of course, I have my personal preferences, as I do for my favorite NFL team. And, of course, this presidential election “was different” though, as it was “the most important” election in the history of the United States of America. I know this with certainty because they said it on “Saturday Night Live”.

After a rough end to October, when US equities posted their worst weekly decline since June, stocks rose in the first two trading days of November heading into Election Day. Long-term US government bond yields also increased, continuing their steady push higher from their early-August lows. The moderate, roughly 33 basis-point increase in 10-year yields over the last three months has come partly from real yields and partly from inflation expectations.

The startlingly quick rise in COVID infections across Europe over the last month (Figure 1) has caused many countries to reimpose restrictions. France announced a second national lockdown, Germany will begin a partial lockdown in November, Spain began a nationwide curfew and declared a new state of emergency and most other countries in the region have enacted activity limiting measures to combat the coronavirus resurgence. Although the death rate has remained low, hospitals are not overrun and treatments are much improved, market participants are clearly concerned. For most major asset classes, gains made earlier in October have been wiped out swiftly.

The U.S. election is a week away, but the end date of the fight for the presidency is still unknown. The next round of fiscal stimulus remains in limbo with both sides saying they want to reach a deal, but neither willing to budge. Confirmed COVID-19 cases are rising sharply across the United States and Europe, and rigid restrictions are on the rise, a potential setback to the hoped for pick-up in economic activity into year-end. There is barely enough newsroom for lingering geopolitical issues related to Brexit, China, Iran and Russia.