Monthly Economic Update: November 2020
Markets entered November with enthusiasm following extensive volatility earlier in the year. Investors cheered as they gained clarity on two key uncertainties. First, there were a series of announcements surrounding the development and availability of multiple COVID-19 vaccines. The widespread availability of vaccines is likely still months away, but investors were pleased with early efficacy results and visibility into a potential end to this pandemic. Second, the U.S. Presidential election came and went with Joe Biden gaining control of the White House. Despite the shift in the executive branch, legislatures are expected to remain divided likely paving the path for muted levels of change over the next four years. Overall, markets appeared calmed by the prospect of a more traditional administration and restrained changes to the tax code.
Indicators suggest that the economic recovery is progressing but there is still a long path ahead. Encouraging signs in the U.S. included improved manufacturing and service activity along with a one percent decline in the unemployment rate to just under seven percent. On the other hand, falling consumer sentiment and record levels of new COVID-19 infections painted a more mixed picture. In Europe, heightened restrictions in response to spiking coronavirus cases hampered the recovery with service activity and Eurozone confidence taking the biggest hits. While there are some flare-ups in places like Japan, Asia’s containment efforts of the pandemic are ahead of the rest of the world. China, the original epicenter of the pandemic, continues to be the furthest along in the recovery which is reflected in recent economic data.
Fiscal and monetary support stayed on the table for much of the developed world. Although a divided legislature remains an impediment in the U.S., some form of fiscal stimulus is expected to get passed in the coming months that falls somewhere in between Democratic and Republican demands. Other major global central banks also appear poised to keep borrowing to fund economic support for businesses and individuals hardest-hit by the pandemic. Monetary and fiscal support should help bridge the gap between the current spike in cases and future normalcy following wider dissemination of vaccines. That said, ballooning sovereign debt levels will be an obstacle to overcome for future generations.
November was a great month for risk assets with both stocks and bonds realizing meaningful gains. Equity markets were a standout with several major indexes increasing double-digits and reaching record highs. November also marked an important turning point for the broadening out of market strength as the ‘reopening’ trade came into favor. This helped value stocks narrow the gap in yearly performance relative to growth stocks. In the U.S., small-cap stocks were another stand-out with the Russell 2000 Index increasing nearly 20% over the month. Outside of the U.S., developed international stocks had impressive gains benefiting from similar optimism and further U.S. Dollar weakness. The bond market produced favorable results boosted by modestly lower yields and tighter spreads for credit-sensitive asset classes. In-line with equity markets, ‘riskier’ portions of the bond market – such as high yield – had the highest returns.
Although significant progress has been made on putting this pandemic behind us, many hurdles remain. Vaccine candidates have proven effective but have yet to receive formal approvals and a variety of logistical hurdles are in place before they can be widely disseminated. The economic recovery has also come a long way, but the world is well behind where it started 2020 at and governments have tacked on record levels of debt. All these reasons suggest that heightened market volatility could spill over into 2021. As a result, it’s important to remain focused on long-term goals and ensure that your investment portfolio is allocated appropriately to tolerate a potentially bumpy path to the new normal.
This commentary was written by Craig Amico, CFA®, CIPM®, Senior Investment Analyst, Noreen Brown, CFA®, Director of Portfolio Management and Steven Melnick, CFA®, Senior Investment Analyst at Summit Financial, LLC., an SEC Registered Investment Adviser (“Summit”), headquartered at 4 Campus Drive, Parsippany, NJ 07054, Tel. 973-285-3600. It is provided for your information and guidance and is not intended as specific advice and does not constitute an offer to sell securities. Summit is an investment adviser and offers asset management and financial planning services. Indices are unmanaged and cannot be invested into directly. The Russell 3000 Index measures the performance of all U.S. common equity securities, and so serves as an index for all stocks in the U.S.; the Standard & Poor’s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market; the MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada; the MSCI Emerging Markets Index is a free float-adjusted market capitalization index designed to measure the equity market performance of emerging markets; the Bloomberg Commodity Index measures the performance of an unleveraged, long-only investment in commodity futures that is broadly diversified and primarily liquidity weighted; the HFRI Fund of Funds Composite Index is an equally-weighted benchmark composed of over 400 domestic and offshore constituent funds having at least $50 million under management or having been actively trading for at least 12 months; the Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index comprising Treasury securities, Government agency bonds, mortgage backed bonds, corporate bonds, and some foreign bonds traded in the U.S.; the Bloomberg Barclays Global Aggregate Ex U.S. Index measures the performance of global investment grade fixed-rate debt markets that excludes USD-denominated securities. The Bloomberg Barclays Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. Data in this newsletter is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.