The corona virus continues to rip through communities around the world, but there are some signs of stabilization in new cases. For example, Europe is starting to see the number of daily new cases trending lower, and some hard-hit areas of the U.S., such as the Midwest appear to be plateauing. For now, however, manufacturing in the U.S. continues to provide a positive trend, but rising unemployment claims and weakening consumer confidence are metrics that may provide reason for concern. Overseas, Europe has implemented broader economic lockdowns in an effort to avoid further delay of global trade recovery – to pre-COVID levels. Our take is the global economy is far from full recovery and reaching a globally synchronized economic expansion, that could take years.
How about fiscal stimulus? Well, hopes of a deal before the end of 2020 seems implausible, but stranger things have happened. From our perspective, elected officials should know how to put their differences aside and focus on what is best for Americans. Presumably, President-Elect Joe Biden is encouraging Democratic congressional leaders to reconsider what’s at stake and work hard to find a compromise with Republicans. In this case, it is likely that something is better than nothing. Ultimately, more fiscal-policy support is needed to create a bridge between today’s uncertain economic conditions and availability of vaccines.
Should we worry about inflation? The massive amounts of monetary and fiscal policy we have seen this year will ultimately be inflationary in nature, but the economic restrictions currently in place are producing a deflationary environment. Inflationary expectations have returned to pre-coronavirus levels, but we are still some time away from seeing higher inflation.
Will weakened relations with China hurt our economy? First, let’s talk about China relations under a new President. Frankly, we don’t see this becoming any less adversarial in a Biden Administration. Undoing President Trump’s tariffs is not a good idea and Biden likely already knows this. While we don’t for a minute believe Biden will impose new tariffs, it is unlikely that he will unwind those installed by President Trump. We hope, and expect, Biden to continue holding China accountable on the issue of intellectual property rights and other infringements.
Our Perspective: We are experiencing the broadest stock market rally since 2013 with 92% of the S&P 500 stocks trading above their 200-day moving average. In fact, we would have to go back to 1980 in order to find a better performing November. Overall, 2020 has recorded five negative months and six positive months. What should we expect for December? Well, no one has a crystal ball, but history suggests more good things. Since 1980, December has averaged a gain of 1.36% on the S&P 500. The evidence portends a solid year-end.
Is now a good time to invest in stocks? Investor sentiment and some technical data are pointing to overbought conditions. Bullishness is moving towards (possibly) extreme levels, and put/call ratios have fallen to multi-year lows. We are not calling for a correction, but these conditions often foretell of profit taking, maybe even a prolonged sell-off. All of this leaves stocks in position of uncertainty. The broadening of the current bull market is a good sign, and it is possible the recent rally could continue on additional good news of a the forthcoming COVID-vaccine. But, at the same time, investor sentiment is rising quickly and expectations are high, which could make markets vulnerable to near-term disappointments.
As such, we never advise chasing returns. In the short-term, buying stocks should be done with caution and a well formulated plan. Selection of sectors and stocks requires a lot of research and discipline, this is not the time random buying. We remain optimistic and feel positive about the market outlook over the next 12 months. Just the same, we expect volatility will remain high for the time being and wouldn’t be surprised to see a pullback in the near-term.
Thanks for listening, that’s your December Market Perspectives from OmniStar Financial Group.