November: Record Gains and Relief From Worst Case Fears

November’s stock market gains will go down as some of the best on record. These were driven by earnings growth as well as three pieces of news that were a relief from worst case fears. First was the Biden win without giving control of the Senate to the Democrats, second was the Pfizer vaccine announcement and last was Biden’s telegraphed appointment of Janet Yellen as the next Secretary of the Treasury.

Here are some thoughts on the market, the election, the economy and the Federal Reserve.

Market: New names lead the gains

The S&P 500 gained 10.8% (7.74% Cdn) in November, while the Dow Jones did 1% better. That’s the strongest monthly gain since January 1987.

Interestingly, value stocks outperformed growth stocks by roughly 45% with energy, financials, industrials and materials doing better than the technology, internet companies and stay-at-home stocks that had been leading the market.

Smaller companies significantly outperformed bigger ones, and businesses like airlines, hotels, resorts and cruise lines surged on the prospect of a vaccine.

A critical issue is whether value-oriented stocks will maintain their leadership or whether leadership will revert back to a small group of technology companies. The test is likely to come after a small correction, when we see which group leads the next rally.

With 86% of companies trading above their 200-day moving average and bullish sentiment at 60%, short-term caution is warranted. Nevertheless, there is a lot of money still available to enter the market, as cash and other liquid assets have shot up $2.6 trillion to $16.3 trillion.

U.S. Election: Big changes off the table

The Biden win without a blue wave allowing the Democrats to take over the Senate is probably more about what won’t happen than what the new administration will propose. Off the table are higher taxes, massive federal spending, universal basic income, nationalized healthcare, a packed Supreme Court and a Green New Deal.

However, there is a runoff election this January for two Senate seats for Georgia. The Republicans lead in the polls, but it is worth anticipating what happens should the Democrats win those seats and the Senate becomes tied at 50 members each.

Kamala Harris as Vice President presides over the Senate and would then have a tie-breaking vote. In this scenario, Republicans would lose their committee chairmanships and their ability to serve as a check and balance to Biden’s plans.

If the Democrats get organized, what has come off the table would suddenly be back on again. However, the Democrats aren’t unified. For example, Joe Manchin, a Senator from West Virginia, is an avowed conservative who recently said, ”I want to rest those fears for you right now… whether it be packing the courts or ending the filibuster, I will not vote to do that.” He further stated that the “Green New Deal and all this socialism was not who we are as a Democratic Party.”

Nonetheless, as Yogi Berra once said, it ain’t over until it’s over.

Economy: Strong expansion but soft patch ahead

Third quarter GDP came in at +33.1% and the fourth quarter is expected to be around +11%. Nonetheless, the market is caught in a conflict. For the next six months, the Corona virus count could continue to climb, threatening the near-term expansion until a vaccine finally rids us of the pandemic and we can get back to normal.

Back in March, the passing of the CARES Act provided Americans with a one-time payment of $1,200 and an additional $600/mo through August. In all, the government provided $842 billion in new benefits while the earnings shortfall amounted to $444 billion, resulting in $398 billion in extra stimulus. It’s the first recession where personal income actually increased.

Not all of this income was spent right away. April savings hit $400 billion, well above the $103 billion baseline as stores were closed. This pushed the amount of cash on household balance sheets over $2.0 trillion. More recent spending on goods has benefited from pent-up demand, while spending on services remained restricted. For manufacturing, this spending arrived as inventories were depleted.

Today, savings are being drawn down and CARES ACT benefits will run out for about five million people at year end. With COVID cases spiking, we’ll have to wait and see if the economy can skate through this soft patch.

Nonetheless, a vaccine and better weather in the spring provide a lot of hope.

Federal Reserve: A familiar name with untested ideas

One of the recent announcements that encouraged the market was Biden’s telegraphed nomination of past Fed Chair, Janet Yellen, as Secretary of the Treasury.

First, it eliminated a more threatening option such as Elizabeth Warren, and was a more moderate choice than what many progressives in the party had hoped for. The selection immediately sent bank stocks 1.9% higher on the day and 4.6% higher for the week.

However, Yellen has a lot in common with the Biden agenda. She favours more government fiscal spending, shares concern over labour market inequality, and was considered one of the most dovish FOMC members. As chair of the Fed, she even suggested that congress should give the central bank the authority to buy equities.

Loose monetary policy is good for stocks and will give Biden a workaround for his policies if Congress won’t cooperate, as he can apply executive orders with financial support from the Fed.

Down the road, this is embarking on untested Modern Monetary Theory, where the government takes over from the banks in deciding what gets spent and who gets to spend it. It is further confirmation that the government will practice Financial Repression, a time-tested method of inflating away the excesses of too much debt by holding interest rates below the level of inflation and GDP growth.


The market has had a pretty significant rally but nothing that isn’t consistent with what we have seen coming out of other recessions. Yet, in the short term, it’s overvalued and could react to negative news coming from a Covid lockdown. The election is behind us, which has resolved a major uncertainty with an acceptable resolution, especially since it appears to assure further monetary policy support.

What is still uncertain is the potential for a surprise coming in January from the Georgia Senate runoff and the stock market leadership in this next phase of the market. But a rotation to value or economically-sensitive companies would be consistent with what we have seen before.

In the meantime, November’s performance has been a reassuring shift in market sentiment.

When the Inmates Start Running the Asylum

Last fall, the market sold off sharply as Federal Reserve Chairman Powell suggested that the Central Bank was intent on raising interest rates further. Bad views for the economy and the stock market.

At the end of July, President Trump tweeted that he was going to introduce tariffs on another $300 billion of Chinese goods. The 10-year Treasury yield promptly dropped to 1.70%. Lower rates, good news, right? Nope. The market dropped over 6% in a week.

So, what gives, and who is setting interest rates?

Bad Attitude

What’s the old axiom? If it’s too good to be true, it probably is. That might be fitting for how the market performed last year.

By the end of 2017, most forecasts were pretty optimistic. First, you had a tax cut approval, earnings for the year now look like they will come in about 24% higher, GDP saw two quarters of growth over 3% which is pretty rare at this stage of the business cycle. To top it off, unemployment remains very low at 3.7%. How could the market not be higher?

Structural Bond Bear?

Each quarter, we write a commentary about the stock market which generally has a pretty near-term focus. In our most recent piece earlier this month, we reiterated a positive outlook for equities as long as a recession or tight monetary policy can be avoided.

However, if you step back from the day to day barrage of facts, there are some longer term factors and issues which we’ve identified and explored regarding the direction of interest rates and are monitoring in the context of the direction of the Fed’s policies and the economy.

Hope for Rotation

We’ve said repeatedly that we believe the current bull market will continue until there is either a recession or a restrictive monetary policy.

So far, that position has been accurate as the S&P 500 recently hit a new all-time high and the length of this bull market, according to some, has become the longest on record, beating the previous bull market that took place between October 11, 1990 and March 24, 2000. However, there are those who say the market decline in the 3rd quarter of 1990 was actually a correction. If they are right, then the bull market of the 1990’s actually started on December 4, 1987. That extended bull market lasted 4494 days compared to about 3500 for our current run. That might lend some comfort to those trying to handicap how far we are into this cycle. Furthermore, the current economic expansion supports the market as it will become the longest expansion on record in July, 2019.

Handicapping The Future

Since the January high and subsequent 10% correction, the market has been in a relatively narrow trading range for roughly five months. However, earnings estimates continue to improve and the economy is reasonably strong. So, why the hesitation? In my opinion, it has to do with having a clear view of the future and what is fogging our lenses is the Federal Reserve policy and foreign trade negotiations. Markets don’t like uncertainty and until we get some resolution to these issues, especially the trade impasse, the market isn’t likely to make much headway.

Correction, Transition or Bear Market

Believe in the Easter Bunny? Then maybe you’re an April fool. Believe in foxes, as in “Crazy like One”? Then maybe Trump’s tariff strategy isn’t that bad. OK, my apologies to the foxes.

Nonetheless, tariffs and trade seem to be the latest issue to afflict this market which came shortly after an inflation scare in the form of a higher than expected January wage increase which sent the market to its first correction of over 5% in more than a year.

Although they may seem like uncorrelated issues, they are not. Both factors have an impact on profit margins. But I’ll come back to this shortly because it is the essence of the bear case for this market.
In the meantime, I wonder if this market is like the proverbial bug in search of a windshield; it is looking for a reason to correct and these are the most convenient excuses. Earlier, many thought the market was overvalued and should correct. But, with tax cuts and synchronized global growth, valuations have come back into the reasonable zone.

An Old Adage

There’s an old adage on Wall Street that says, “Buy the rumor, sell the news.” It’s a simple synthesis of how the market operates in that it reacts to expectation or forecasts, it doesn’t wait for them to be announced. And when there is an announcement, it’s often too late for an investor to take advantage of it because it’s already priced into the market. And for a trader, it’s time to sell.

We saw a good example of “buying the rumor” late last year as it became more apparent that tax reform legislation would be passed in the United States. When it was signed into law on December 22nd, that was the news. Time to sell? Well, we think not. In this case, tax reform is broadly considered positive, but the real impact will be company and industry specific. So, we think the “news” will be revealed in the fourth quarter earnings reports which will start in mid-January.

Chasing the Tax Cut Carrot

Although tragic, the nice thing about hurricanes Henry and Irma is that they took President Trump off the front page, temporarily.

Nonetheless, politics on both sides of the border have had an influence on the market. We shouldn’t forget we have our own tax drama going on here at home with Mr. Morneau’s proposed tax changes.

I’ll address the Trump effect, but first let me give you my conclusion.

Bottom line, I’m still positive on the stock market. The economy is growing as are earnings while the U.S. Federal Reserve maintains a modestly accommodative monetary policy. I don’t anticipate this stance changing until we get either the threat of a recession or much tighter monetary policy. The only concern I have is with valuation. The stock market isn’t cheap. Other forecasters however, have conflicting opinions about the market, but the reality is that the stock market is at an all-time high despite greatly reduced expectations about the Trump administration’s economic agenda.


It doesn’t seem that you can have a conversation about the market without it becoming immediately dominated by a discussion on President Trump.

I must admit I like many of his policies. If effected, they could do wonders for the economy and the stock market, and I’ll get to that momentarily.

However, his deportment as the leader of the world’s most powerful country does leave something to be desired. But, out of respect for his office, I thought I might raise the bar and take the lead from one of the world’s truly great leaders, Winston Churchill. He was always good at a little misdirection when talking about someone else and used paraprosdokians to make his point.
These are figures of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. As I said, Winston Churchill loved them and I thought I might recount a few that he might use today