November was a spectacular month for global stock markets, with most markets up double digits including the S&P/TSX (up 10%) and the S&P 500 (up 11% in USD). On a year-to-date basis, most markets are now in positive territory. With a good December, 2020 could look like a “normal year” for a typical balanced portfolio of stocks and bonds given that Canadian bonds have also had a good year thus far.
The market rally was sparked by a positive resolution to the U.S. election. There were minimal protests and despite some lingering court challenges, the election is seen as being fair and legitimate. Democrat Joe Biden is expected to be in the White House in January and will likely face a Republican-controlled Senate. Historically speaking, this tends to limit the President’s ability to implement large sweeping changes. Markets tend to appreciate the status quo.
After the election, the rally gained speed on positive vaccine news. Both Moderna and Pfizer announced effective COVID-19 vaccines, and it’s expected that large-scale vaccination programs can begin in early 2021. Interestingly, this news overshadows concerns brought on by a significant increase in COVID-19 cases globally.
Fear and greed
Typically, investing is dominated by a single theme each year. Recent examples include: growth vs value, extreme outperformance by the FAANG stocks, or the sky-rocketing value of cannabis stocks. This year, we’ve had no less than four distinct market themes as investors have oscillated from greed to fear and back again. The four phases have been:
- Accelerating economic activity – The year started out well with growing consensus that global growth was speeding up.
- COVID-19 pandemic – Investors shifted from greed to fear as implications of the spreading pandemic took hold. Investors flocked to safer investments like government bonds, consumer staples, utilities and telecoms at the expense of corporate bonds and cyclical stocks.
- Working from home – Once governments started to inject copious amounts of cash into the economy and central banks cut rates to the bone, investors started to buy up shares in companies that would benefit the most from social distancing and avoided those that would be hurt. Technology, in particular, benefitted while anything related to our ability to move around, such as travel, was hit the hardest.
- The reopening trade – The vaccines have now ushered in yet another phase and a return to greed. Energy, cyclical stocks, financials, and base metals are all performing very well as we anticipate a more normal world in 2021.
The chart below shows these phases of the market as laid out by CNN Business’ seven-factor Fear & Greed Index.
Time in the market
With so much volatility and uncertainty, it’s no surprise that many were tempted to move to the sidelines. Of course, that would have been a mistake as this year has demonstrated the validity of the old expression that “time in the market” matters – not “timing the market”.
Let’s look at what would have happened to an investor who sold out at the depths. The market bottomed in late March and, as the chart below shows, selling out then would have locked in a 30% loss while staying invested lead to gains by the end of November.
Put differently, if you’d invested $100,000 across global stock markets on December 31, 2019 then sold on March 23 and went to cash, you would have about $70,000 by the end of November 2020. The same $100,000 invested at the start of the year by a patient investor who rode out the downturn has actually increased in value over the same time.
Source: Capital IQ
Looking ahead – what works tomorrow
November was a spectacular month for returns. In fact, the past eight months have been very strong. Interestingly enough, once we moved from one market phase to the next, the stocks that were leading have often actually fallen in value. For instance, consumer staples largely peaked during the darkest days of the selloff. The work-from-home stocks are still up significantly this year but lagged as we moved to the reopen trade, while many of the reopen stocks are now back towards their 52-week highs. It’s a reminder to not chase returns and to stay diversified. What works today may not work tomorrow.
The markets seldom move up in a straight line. Although we look to 2021 as having a strong backdrop for investment returns, we fully expect there to be volatility and pullbacks in asset prices. There’s still a lot of uncertainty out there. The best preparation is to work with your portfolio manager to have a well-thought-out plan ahead of time that gives you the confidence to stay invested.