Monthly Market Muhsings - November 2020
Markus Muhs - Dec 02, 2020
Current events in November, and the reaction of the markets, could turn out to be pivotal in the greater scheme of things.
When I wrote last months’ Market Muhsings my worry was that the U.S. Election would have an undesirable result, and my aim was to prepare readers for a likely pullback in the markets; a continuation of a pullback that seemed to be gaining momentum at the end of October. I couldn’t have been farther off the mark, but that’s the unpredictability of the markets and why I’m not here to predict or over-analyze them, but just to provide my “Muhsings”.
The U.S. Elections
General consensus is that the election results were probably among the better outcomes anyone could have hoped for. Trump’s out, Biden’s in, which could bode well for reducing the frequency of unexpected market volatility resulting from random Trump Tweets. The damage done to global trade (including between Canada and the U.S.) may mend. Fear of increased taxation is tempered by the fact that outside the Presidency the Republican Party did fairly well, increasing its seats in the House a bit, and not losing the Senate (at least not so far, but expectations at this point are for them to win the Georgia Senate run off elections in January and retain Senate control).
Overall, I think the election outcome also might dampen the forces of political polarization that have been present for at least the past decade. What I mean is that perhaps, after Trump’s loss, the GOP might steer the ship more towards the center, away from populism. The Dems also need to look themselves in the mirror and wonder why they didn’t beat Trump more convincingly and why their showing was rather poor in Congressional and state elections. Bill Maher put it best in this video; essentially they need to recognize that appealing to fringe elements on the far left might be the wrong direction for the party.
The Market "Turnaround"
Now, on to the markets. The markets got an extra shot in the arm in November by ways of vaccine news. We’re now 10 months into the global pandemic and with at least 3 vaccines in the pipeline proving to be safe and effective, and expected to be approved and beginning distribution in mere weeks, we can finally see the light at the end of the tunnel. Yes, we’ll be well into 2021 by the time the majority of the world population gets access to these, but it’s hope.
If March was the Death Star terrorizing the galaxy and destroying Alderaan, the development of therapeutics and cessation of the “first wave” in spring/summer was the Galactic Empire’s defeat at the Battle of Yavin. The start of the second/third waves this fall are The Pandemic Strikes Back, but now we’ve got the second Death Star plans and are prepping for our final battle. We’ve still got the Battle of Endor ahead of us this winter, but hope is on the horizon!
The interesting thing about the markets in November isn’t just that this was a pretty strong month overall, as you can see by the table above, but we’re also now finally seeing those parts of the markets that didn’t participate in the tech/WFH rally this year catching up. Check out the Russell 2000. No, I didn't accidentally put the year to date number into the month column; it actually was up over 18% in just one month!
This index of small-cap stocks has been a laggard for a few years now. While the mostly large-cap S&P 500 forged new highs in late 2019 and throughout 2020, prior to November the Russell 2000’s best days were still in the rearview mirror, having last forged a new high in fall of 2018. In November it came roaring back, with the best monthly performance in its history. For the first time since I started the "Potential Drawdown Table" I've been able to update a new all-time high for the Russell 2000.
2020 has been a terribly frustrating year—or an extension of frustrations from the past number of years—for value and small-cap investors. These factors, already laggards going into 2020, just took beating after beating, with the value factor reaching historical levels of underperformance relative to growth in September. Basically, when the markets crashed in fall 2018 and Feb/March 2020, these stocks crashed just as much as everything else, if not more, while in both recoveries in 2019 and 2020 they only partially recovered, while growth stocks—already considered too over-valued by many value managers—broke record after record. This underperformance literally did a 180 over the past three months, as you can see above. The graph shows small-cap (purple) and value (blue) companies now significantly outperforming growth companies (red).
This greater participation in market growth, by a larger proportion of stocks and not just the biggest stocks and the tech sector, is what we call “breadth”. It’s generally a good technical sign of market strength; at the very least it represents actual optimism about the economy in general.
Markets, as we say, are always forward pricing. They price the future, and throughout this year it seems like they were always pricing 6 months out. First completely blindsided by Covid in Feb/March, then pricing in the expected success of tech/WFH stocks that's panning out in their earnings over the past few months. Now, the markets are pricing summer 2021, and the expectations are that by then many of us will have been vaccinated and the economy will have fully re-opened. Further potential market growth from this point forward would entail continued strength in the second half of 2021, however, there’s always the possibility that we might be a bit too hopeful. Some pitfalls along the way, such as delays in vaccine distribution, can still derail this broad-based market recovery, though only temporarily.
Bottom line—and this is why I do these Muhsings, to help you understand the markets—is don’t expect that you can get in now to participate fully in the 2021 economic recovery. You have to already have been in the market, you’ve already seen part of the 2021 recovery in today’s stock prices.
This forward-pricing concept is what is often difficult for new investors to understand; why it’s so impossible to time the markets, and why getting into cannabis stocks in late-2018 (around the time of legalization) wasn't when the money was to be made. Pumpkin futures reach their high point well before October each year; the time to buy them was probably January.
If the headlines are bad, as they were in March, you can’t decide at that point to move to the sidelines; the markets already had priced in the worst-case scenario, with the market indices at the time having briefly wiped out more than 3 years of returns. From that point on, while the economy and pandemic remained in the headlines, it was 6+ months out that the markets were pricing. In other words, you couldn’t have waited for “things to settle down” before investing; the market wasn’t waiting for you. You cannot avoid volatility and expect the market return, and I can guarantee you won't achieve greater than the market return over the long-term doing this.
For that reason, successful investors don't waste their time market-timing or stock-picking and shouldn't really care that much about the numbers on the monthly returns table above. Just stay invested, keep investing through a monthly savings plan, and review your financial plan annually; not your account statements monthly.