December 4, 2020
After a stellar November during which the Dow Jones Industrial Average had its best monthly return in 30+ years, bulls charged into December setting even more highs. With the election now a distant memory, investors have shifted their attention to signs that stimulus discussions are gaining traction in Congress and hopes that Moderna and Pfizer will receive emergency authorization from the FDA in the coming days, after Pfizer received approval from the UK’s health regulators on Wednesday. Economic data gave investors additional reasons to cheer this week with reports showing strong demand for both U.S. and Chinese goods. Friday’s jobs report also showed continuing gains in employment even as COVID cases across the country surge. It was full speed ahead this week with bulls managing to push the Dow Jones Industrial Average higher by 1.03% to an all-time high of 30,218.26.
Employers Tap the Brakes as Covid-19 Cases Surge
Surging Covid-19 cases across the country prompted employers to pull back on hiring in November. Nonfarm payrolls rose 245,000 during the month. That was well below analyst estimates of 440,000, but to the degree the number itself may have been a disappointment, investors made their bet that the report only bolsters the case for an additional aid package that is being debated within Congress. While some momentum has been lost on the hiring front, the unemployment rate edged down from 6.90% to 6.70%, driven by a drop in the labor force participation rate. Job gains were made in professional and business services (+60,000), health care (+46,000) and COVID’s unsung heroes, warehouse workers (+145,000). Traditional brick-and-mortar stores, which have historically boosted payrolls with help for the holiday crunch, pulled back in November as they adjusted to significantly lighter foot traffic due to the pandemic. November’s slowdown was expected and is likely the first of what will probably be a series of slowing jobs reports over the coming months as lockdowns are likely to be more prevalent through the spring. Still, the jobs picture is significantly ahead of virtually all estimates made at the onset of the pandemic, where at last count the economy has brought back 12.3 million of the 22 million jobs lost in the first two months of the crisis.
U.S. Manufacturing Renaissance Marches On
One of the most important takeaways from the pandemic will likely be that it will have demonstrated the resilience of the U.S. economy and its workforce. The reorientation of supply chains, the pace of technological adoption, and the evolution of companies’ sales and operational models have occurred at a pace not seen since a major world war. Nowhere has this been more evident than in the U.S. manufacturing sector where COVID-19 has reinvigorated factory floors in response to strong consumer demand and the need for greater self-reliance. This week, the Institute for Supply Management released its Manufacturing Index, posting a reading of 57.5. This was slightly lower than October’s two-year high of 59.3 but solidly above 50 which is considered the demarcation between expansion and contraction. The index’s gains were broad based, driven by strength in new orders, production, and new export orders, while the business forecast remains strong, benefitting from consumers stocking up and beautifying their homes while the pandemic lingers.
China Manufacturers Gear Up
China’s manufacturing sector hit a decade high in November as its economy returned to pre-pandemic levels. The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) rose to 54.9 in November, beating October’s reading of 53.6. The report also showed that new orders and factory output hit decade highs during the month. Factories increased their payrolls in November as well. This was the third consecutive month of faster hiring, and it signals positive sentiment among factory managers who are adding head count in anticipation of accelerating global demand in 2021.
The market’s momentum seems to have no limit these days. The positive vaccine developments announced over the past several weeks have resulted in the market broadening and rotating into cyclicals, financials, consumer discretionary, REITs, small caps, and energy. Investors, if they weren’t invested before, are going all-in now. As of Friday’s close, the S&P 500 is 15% higher year-to-date. This begs the question whether this fundamentally makes sense? Are earnings going to be 15% better 12-18 months from now than they were prior to COVID? Not likely. Sure, 2021’s numbers will look strong relative to 2020 comps, but probably not so relative to 2019’s. We’re not throwing cold water on the rally but simply pointing out that the market is increasingly being driven by non-fundamental factors – namely multiples expansion (due to low interest rates) and momentum (due to emotion and idle cash coming in from the sidelines). Pockets of value remain. There are a number of good companies that are still down 10%-20% with the potential to regain their pre-COVID highs, but November’s acceleration has begun to expose areas of overvaluation. There certainly is an emotional component to the market’s recent pop in knowing with some certainty that COVID now has an expiration date, but investors need to stay grounded and ask themselves what is baked into the market today. Next year’s earnings are almost certainly baked into today’s valuations under the assumption that a vaccine is successful. A stimulus deal, an orderly transition to Biden’s administration, and Republicans maintaining control of the Senate are also probably baked in. What then is the next catalyst? Over the last six months the answer to that question was simple – a vaccine – but what now? In short, the market is priced for perfection and while there is a lot to look forward to, one cannot ignore that we still have three to four more months of tough slogging ahead just to get back to the point where the economy can fully reopen, and then we have to grow from there in order to justify today’s valuation. It almost certainly will happen, but not as certainly as markets believe.
The Week Ahead
It’s a relatively light week for U.S. economic data with reports on productivity and inflation being the highlights of the week. In global economic news, China releases import and export figures.
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Deck the Halls
Much like so many things in 2020, the holiday decorating rules were thrown out the window. It was previously thought by many to have been taboo to have your Christmas décor up before Thanksgiving, and while plenty of people break with tradition on the unspoken rule, this year, holiday season decorating began early. Like really, really early. And it seems to have been a welcomed harbinger of joy and cheer by so many Americans.
While some of us may just now be pulling out the boxes of ornaments and untangling strands of twinkle lights, record numbers of people put up their Christmas decorations months ago, inundating social media with pictures of homes that had already transformed from Halloween to the holiday season. Google Trends shows that Christmas decorations and searches for Christmas music began rising in popularity in mid-September.
Psychologists say decorating is one way we can safely and healthfully lift our spirits. The earlier you put up Christmas decorations, the happier you’re likely to be since those decorations help people tap into the excitement and magic of the season and bring back joyful feelings and memories associated with this time of year. Those lights really do make spirits bright.
In addition to all the holiday tinsel and trimmings, consumers are buying trees in record numbers as well in 2020. Tree sales are up 29% so far this year, according to a survey by Evercore ISI. Christmas tree retailers are reporting incredible demand, and consumers are splurging for bigger trees and décor such as garlands and wreaths. The median price for real trees sold in 2020 is expected to be up 7% from last year to about $81 and up 23% from 2018.
As people spend more time at home during the pandemic, dollars spent on expenses such as plane tickets and gasoline are being replaced by spending on making our homes festive, merry, and bright. We wonder if those trees and lights might stay up a bit longer this year as well.