Hello friends, welcome to the December 2020 market outlook. We hope this letter finds you well and your families enjoyed a wonderful Thanksgiving. Obviously, this year was different from a variety of ways. But with the holiday season upon us, we’re approaching the end of a dreadful year. Here’s to 2021 being a major improvement. Let’s dive in.
In our last outlook we discussed equities heading into seasonal strength, and boy did they. November was the best month in history for global stocks. The current market cap of $98.7 trillion equates to 112% of global GDP, a level no one saw unfolding for quite some time. At its current price, the S&P 500 is trading at 21.7 times its forward earnings. That’s 2.4 standard deviations above its five-year average. The index’s price-to-sales ratio hit 2.7 times in November, the highest it’s been in 30 years. In order to provide some more color, here’s a quote from Peter Boockvar, Chief Investment Officer at The Bleakley Advisory Group: “there’s the earnings yield, earnings per share divided by the stock price, or the reciprocal of the P/E ratio. (If Stock ticker $XYZ is trading at $10 on 50-cents earnings per share, its P/E is 20-times and its earnings yield is 5% [50 cents/$10].) At the moment, the S&P 500’s earnings yield of 3.5046 is on par with that last seen in 2000. History never repeats itself, but it often rhymes. In other assets, Bond yields remain low, but the VIX (volatility index) has stayed elevated, it’s currently on a 195-day streak north of 20, a trend last seen in 2009. The US dollar has been getting crushed. We’re now at the lows last seen in 2018. If it breaks below 88.6, it will be the lowest level we’ve seen the dollar since December 2014. Surprisingly, Bitcoin has benefited more than the industrial and precious metals. In fact, gold has been dragging. We believe this is a misunderstood trade. It could be an unwinding of the “fear” trade (virus and vaccine related), but we believe gold heads higher not out of fear, but due to a creep up in inflation in 2021. Back to Bitcoin, Bitcoin has morphed into the hottest asset for big institutional investors. Guggenheim just committed up to a half trillion dollars to Bitcoin. Broader adoption of the e-currency has brought its price back near the December 2017 high of $19,511.”
Two things that are evident when we look at November, the momentum trade lives on, and investor’s complacency has run amok. The Citi Panic/Euphoria index reading rose to 1.10 from .87 and that is back to the August high when it printed 1.13. Anything above .41 is considered ‘Euphoria’ so we are now almost triple that. The CNN Fear/Greed index closed Friday at 91 out of 100, indicating extreme greed. The last time we were at these levels was February 2020. That wasn’t that long ago so I won’t bother telling you what came next. Bottom line- it always pays to be greedy when others are fearful, and be fearful when others are greedy. The market is very extended by any measure and appears as extreme in its current exuberance as it was in its fear back in March.
I’d like to touch again on seasonal strength, because there is a chance it’s wavering. After the strongest November, and arguably one of the best months in the history for the market, it’s hard to envision the Santa Claus rally coming to town this year. After all, what compels us higher from here? We know retail sales have been in the dumpster. We’ve priced in a major rebound from the hopeful successful rollout of a COVID vaccine and it looks like new cases are spiking here following the Thanksgiving celebrations, with rumors of shutdowns occurring any day. We may very well have had the Santa Claus rally and I think investors should be aware of that. That said, we have the Federal Reserve and other global central bankers for support, and their support has been unwavering. The Federal Reserve has engineered zero interest rates and delivered a valuation reset that has tested the limits of history and delivered all-time highs in price and valuation despite an unprecedented and debilitating virus. I won’t bore you with the details, but out of 15 stock market valuation factors – 11 are at record levels and the other four are at all-time highs. The market has arguably never been this expensive and is potentially overvalued by 20% or more. That leaves a lot of room for error and for risk to happen fast. It’s hard to imagine December keeping up with the pace of acceleration we witnessed in November, but anything is possible. Remember, the market always does what hurts investors most. Investors, including us, didn’t expect the rally from the March lows to lead to all-time highs. Just as most investors now don’t expect the party to stop, especially with science working to bringing us closer together sooner than we thought. Perhaps the beginning of vaccinations actually becomes a classic buy the rumor and sell the news event?
I’ll leave you with this thought- debt matters, deficits matter and valuations matter. Stocks can go down and they are not a risk free asset. The trillion dollar question is when could these things occur? As we await these answers, be sure to once again assess your risk tolerance and your comfort level with your current portfolio allocation.
At this time we’d like to wish you and your families a wonderful holiday season filled with health and joy. As always, please reach out with any questions and keep an eye out for our January 2021 market outlook and our prediction for the year ahead.