In this week’s market update: shares complete their best-ever month in November; commodities also head for multi-year highs; even as the economic news remains grim.
Global stock market indices notched up record gains in November as investor sentiment was buoyed by the US Presidential election and positive Covid-19 vaccine news.
The MSCI World index, a proxy for the performance of shares around the globe, ended the month 13% higher than it started it. Here in Europe, the Stoxx 600 did even better, up 15%. In both cases this was the best-ever monthly gain.
In the US, the focus on stay-at-home beneficiaries in the technology sector kept a lid on gains, as these shares gave up some of their earlier outperformance in the face of the new re-opening trade in markets. The S&P 500 benchmark still registered an 11% gain in the month, and this was the best performance since the market bounced off its pandemic lows in April.
The drivers of performance have been two-fold. First, the initial uncertainty about the US Presidential election dissipated as it became clear that there was no substance to the Trump administration’s claims of voting irregularity. Although the President was slow to concede early fears of a disorderly handover and possible social unrest came to nothing.
As Joe Biden started to announce his cabinet, investors looked to a calmer, more predictable White House for the next four years. One notable appointment is that of Janet Yellen, the former chair of the Federal Reserve to head up the Treasury. Having a former central banker in charge of government spending is a clear indication of the likely co-ordination of fiscal and monetary policy in the years ahead. That is seen as a positive for markets after a period in which central banks have been forced to do all the heavy lifting in terms of economic stimulus.
The second major positive for shares in November has been a rapid improvement in the outlook for widespread Covid-19 vaccinations next year. With positive trial results on both sides of the Atlantic, it now looks increasingly likely that we can overcome coronavirus next year and start to get back to normal life. That has had a profoundly positive impact on those sectors of the economy hardest hit by Covid lockdowns, notably hospitality, leisure and travel companies.
Markets had regained all the lost ground from earlier in the year on the basis that government and central bank stimulus would provide a bridge from economic shutdown to herd immunity and economic recovery. That muted optimism has now been replaced by even higher hopes for a sharp pick up in activity as animal spirits return and pent up consumer demand is unleashed.
The positive view in markets has been reinforced by big inflows to equity funds, amounting to nearly $90bn over just three weeks in November. And some believe there is even more to come thanks to the wall of money currently parked for safety in money market funds and in the bond market. Re-directing even some of that cash into the stock market could see prices rise even higher.
The changed mood in stock markets has spilled over into other financial markets in recent weeks. The oil price, in particular, has risen by around 30%, albeit from a low base, as expectations for a more buoyant economies have solidified. At nearly $50 a barrel, oil is two and a half times its lowest price this year but still well below the level it stood at pre-pandemic, so producers are likely to feel that they still need to manage the price higher with supply constraints if they can.
Whether to continue with existing supply cuts or allow more oil onto the market now the price has risen is the main focus of discussion at this week’s meeting of OPEC countries and Russia, who have co-operated for some years now in a bid to maximise revenues in a harsher, climate-change focused environment. The meeting due to take place on Monday and Tuesday this week has been pushed back until Thursday to allow more behind the scenes negotiations to take place.
Industrial metals are also in demand, with copper contracts in China hitting an eight-year high this week of nearly $9,000 a tonne. China is a key driver of demand for copper, which is a key component in a range of industries from construction to cars and electricals so news that its factory output is at a three-year high has boosted prices.
Increased risk appetite has also been evident in the declining interest in gold, viewed as a safe haven asset, which has fallen by 6% in November, its worst performance in a month for four years. By contrast interest in bitcoin has risen sharply. The price of the cryptocurrency, an unregulated alternative currency, is up by 300% since March, albeit a big fall last week showed that this is still a highly speculative and volatile asset.
The rally in markets comes despite plenty of negative news on the economic front. Here in the UK, last week’s Spending Review from the Chancellor Rishi Sunak confirmed that the outlook for the UK economy is more challenging than ever in peacetime. Public borrowing is set to hit nearly £400bn this year, GDP will fall by more than 11% in 2020 and debts stand 30% higher as a proportion of GDP than they did before the pandemic.
This was the backdrop to a speech which seemed to signal a change in direction from the free-spending initial response to the pandemic to a more traditionally Conservative approach to balancing the books in future. The Chancellor said the current levels of spending and borrowing were necessary but unsustainable and many are bracing themselves for higher taxes next year with all eyes on the March budget for details of rises in capital gains tax and possibly less generous incentives to save into pensions.
This week we should get an insight into how the US economy is faring through its second wave of infections too. Forecasts for Friday’s non-farm payroll report point to 500,000 new jobs in November, less than the 638,000 in October. The number of so-called initial jobless claims rose to 778,000 last week, a second consecutive rise as rising infection rates curb employers’ enthusiasm for hiring new workers.
Back in Europe, the economic picture is also challenging, with a fourth consecutive month of deflation expected to pile pressure this week on the European Central Bank to beef up its stimulus programme this month. Minutes of the ECB’s last meeting showed the level of concern at the central bank which said the outlook was ‘bumpier than previously projected.’
All in all, the contrast between the stock market’s November performance and the economic data underlines the risks that investors may have got slightly ahead of themselves. On the basis of forecast earnings and the recent strong run, and looking at the evidence from previous four-year Presidential cycles the next two years might turn out to be positive but less dramatic than the rally we’ve enjoyed since the spring lows.
Typically, the first two years of the cycle produce below average returns while the big gains occur in the second half of the Presidential term when the re-election campaign beckons.
But there is a plausible case to be made for 2021 turning out to be another hot year for stocks as widespread vaccinations fuel a re-opening of the economy even as the authorities err on the side of caution with continuing fiscal and monetary stimulus.
What does look likely, however, strong the overall rally turns out to be, is an ongoing rotation from defensive growth shares into more cyclical value plays. Although this process has already started in recent weeks, the long-term preference for those reliable companies over the past decade or so means there is plenty of catching up still to do.