December 2, 2020
The headlines are touting how November was the best month in 30 years. It was a very strong month that also had the benefit of October closing at its low on October 30th. The September and October lows are the bottom of the sideways range we have seen since early August. The post-election rally has broken out above that range and we are likely to see higher highs in the near term. I do not expect to see more than a 5% decline in the coming weeks. The SP500 gained 11% on the month, bringing it up to 12.1% year to date. The first four days of the month saw the SP500 gain 7.4% and since then has been a slow grind up. Woe unto those who were out of the markets for whatever reason in early November.
While the S&P 500 gained 11% in November, our average moderate portfolio gained 7% on the month. Bonds (TLT) gained slightly, and gold went from 1880/oz. to 1780/oz, a decline of 5.6%. Gold has given up 15% from its all-time high in early August through November’s close. If one looks very closely at GLD’s price movement, there are two approximately equal declines of 11% since August. This may indicate the end of the decline. Gold has gained more than 3.5% the past 2 days. Over 1850 should be the all-clear. The only changes I have made in the precious metals area is to have sold gold miners in August and then buying that portion back recently. Gold has dramatically outperformed stocks over the past 2 years through August, but stocks have been catching up during gold’s respite. I remain bullish on gold and stocks. Bonds and interest rates continue to vacillate, with prices continuing to ebb as expectations of economic growth assume a higher demand for and ability to obtain new credit.
Over the past few months, the number of individual stock holdings has waned as markets have fluctuated. Expect to see several names added soon with our usual starting allocation. One name that we have held for several months finally came to life in November as its vaccine was approved. I plan to continue to hold MRNA and look to reduce it gradually into higher prices. Its weight in portfolios has grown so much that its weight amongst other holdings is too high, which could lead to too much portfolio volatility.
On the sector level, energy has come up strongly, outpacing all other sectors the past month. This may seem counter intuitive, given that there is a Democrat coming into the White House. The energy sector was so undervalued/oversold/hated that it has no where to go but up. Since the recent low October 28th, the sector had climbed some 45%(!!) through November 24th. More recently it gave up almost 30% of the initial climb. Ideally, another 10% decline would make for a great long-term entry. Energy has been exceptionally strong the past month and is still substantially below where it was early this year.
Overall, we are on track for a very solid year and I am optimistic going into first quarter of 2021. Sentiment has been and likely will remain the primary driver of asset prices near term. Fundamentals have a long way to catch up and traditional metrics remain at ‘all time most expensive’ range. While sentiment can carry prices further, we really need to see earnings catch up substantially in Q1 and Q2 to avoid any large “air pockets” for prices. Sometimes prices climb much faster during the anticipation of good things (back to normal life for example) and then progress slows. The grind in prices since the first week of November might be an indicator of such.
Adam Waszkowski, CFA
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