In a month that included a contentious presidential election and a surge in coronavirus cases, November still turned out to be one of the strongest months for markets in decades. The Dow Jones Industrial Average rose nearly 12 percent, its best month since 1987. The S&P 500 posted its best election week rally since 1932. Small cap and value notched their best month ever, a clear sign that the stock market recovery is broadening beyond big tech and into cyclical names that benefit from a strong economy.
We’ve been expecting as much for some time now. In our Q3 commentary published in October, we wrote:
“Performance in many sectors is being driven positively by companies that are helping us live our lives during COVID-19. Meanwhile, segments of the U.S. economy where the virus is a significant headwind have been a drag. However, we think there may be opportunities in asset classes and sectors currently facing headwinds as we continue to inch back to what was ’normal’ pre-COVID-19.”
Earnings in October showed our thesis was on track, and then markets further validated our expectations for a broader market recovery in November as a notable rotation into small-cap and value stocks took hold. We expect a similar theme to carry on well into 2021 as markets ride dual tailwinds of stimulus and easy monetary policy from the Federal Reserve.
All told, November’s market activity underscored the importance of resisting the urge to abandon diversification to chase sectors or stocks that have been “working” lately. It’s why a financial plan is such a critical component of successful investing and building long-term wealth. Now, to the week that was and the week that’s ahead.
WALL STREET WRAP
A Lighter Jobs Report: Employment growth slowed more than expected in November, with nonfarm payrolls rising 245,000, down from 610,000 in October. The unemployment rate dipped from 6.9 percent to 6.7 percent, in line with expectations. Job gains were concentrated in warehousing as well as professional and business services. No doubt it’s important for the labor market to maintain a recovery course for the sake of the economy and society, but for now markets are looking past jobs data that didn’t meet expectations.
That’s because, as we’ve outlined in a series of commentaries, the Pfizer and Moderna vaccines have set a rough end date to the pandemic. We aren’t attempting to diminish the difficult months ahead for families, but from a purely markets perspective we expect investors will look past negative headlines or a few misses on economic data reads over the next several weeks and remain firmly focused on spring 2021 — when wide distribution of vaccines and an end to the pandemic’s disruptive force is expected.
U.S. Services, Manufacturing Still Strong: Both the U.S. ISM manufacturing and services indexes remained in expansion mode in November. The manufacturing ISM came in at 57.5 in November against a read of 59.3 in October. New orders were strong, and customer inventories remain extremely light (a 10-year low), which is a good indicator of future growth. While employment was weaker in the report, there’s a silver lining. ISM Survey Committee Chair Tim Fiore said, “It’s not a lack of work; it’s a lack of people.” We had worker shortages.
It was a similar story on the services side: a read of 55.9 in November versus 56.6 in October. The ISM indexes, combined, represent 36 industries. In November, 30 of those 36 industries reported growth — this is up from just four in April. This is the backdrop driving the rotation that’s broadening the equity market recovery (described in the intro).
A Check on China and the Eurozone: It was an incredibly busy month in the U.S., but we should tilt some attention overseas to gauge the global recovery. In China, manufacturing activity expanded for the ninth straight month in November as the country continues to drive out of its pandemic slump earlier in March. The official Purchasing Managers’ Index came in at 52.1, compared to 51.4 in October (a read above 50 indicates expansion). The data show manufacturing activity is accelerating, driven by a recovery in imports and exports and improving domestic demand.
The services sector also expanded, hitting 56.4 compared with 56.2 in October. The Caixin PMI, which tracks smaller firms and exporters, reached a 10-year high of 57.5, fueled by a surging manufacturing sector enjoying the highest level of new orders in a decade. Services was no slouch either, clocking in at 57.8. All signs indicate China is humming and still strengthening.
It was a different story in the Eurozone. The services sector is being stung by COVID-19 restrictions, but manufacturing is holding steady. Data from IHS Markit showed the composite Eurozone PMI fell to 45.3 points in November from 50 in October — that marks a six-month low for the index. Business activity sank as leaders in the region introduced new lockdowns in October to limit the spread of coronavirus, which particularly impacted the services sector. The German economy has shown some resilience, as manufacturing showed signs of growth — the country’s composite PMI held at 52, implying economic expansion. Overall, the Eurozone manufacturing index stood at 53.8 for the month.
A Big Day for Pfizer, and America: On Thursday, an advisory committee of the Food and Drug Administration will meet to consider whether to grant Pfizer an emergency use authorization for its heralded COVID-19 vaccine. After the vote, it will head directly to the FDA for final approval. The FDA typically follows the recommendations from its advisory panel, which means Pfizer’s vaccine authorization could be granted within a day or so from the vote. Once that final approval comes, Pfizer’s CEO Albert Bourla said the company is ready to begin shipping doses within hours.
Meanwhile, Moderna expects the FDA’s advisory board to take up its emergency use authorization Dec. 17. Just think: Back in March we weren’t even sure if a vaccine was possible. We’ve come a long way.
Consumer Sentiment on Friday: How are consumers feeling heading into the final month of the year? We’ll get a pretty good sense when preliminary results from the December University of Michigan Consumer Sentiment Index are released this week. It’s an interesting monthly report, as it typically contains deeper commentary and insights about the numbers from Richard Curtin, the survey’s chief economist.
A Less Heralded Bright Spot: One of the more underappreciated, and underreported, trends we’re seeing is that productivity has ticked higher over the past few years. If long-term growth potential is a byproduct of the number of people working and how productive they are, the more recent increase here is great news. On Tuesday we’ll get another read on that metric.
And a Few More: The following day, wholesale inventories will shed some light on the total value of goods merchants are holding. A lower than expected reading can be a bullish sign, indicating items are being sold and depleted inventories will soon need to be replenished (a good sign for manufacturers). Lastly, on Thursday we’ll get a read on inflation — worth watching to see if the economy is headed closer to the Fed’s target of 2 percent.
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