- Dow Jones Index Outperforms Nasdaq Since Pfizer Announcement
- Cash Deposits In Commercial Banks Elevated Since March 2020
- Global Economy Is Structurally Weak
(Singapore, 17 Nov 2020) — With the U.S. Presidential Elections effectively over, things are looking up as this has removed a major uncertainty that clouded markets sentiment over the past couple of weeks.
Adding to this bullishness has been the positive news about the success of vaccine trials, first by Pfizer and then Moderna, just a few days ago.
However, indications are we are in the present cycle’s last inning rather than at the start of a new cycle.
In all, we have seen the equity markets posted strong gains in November (to Nov 16 close): the US S&P500 is up 9.6% while the local Straits Times Index is up 14%. At the same time we have seen safe haven assets stagnate and even decline in price over the same period, namely gold 0% and Dollar Index -1.4%.
There has also been a rotation out of “stay at home” growth stocks like Zoom and other tech-stocks as investors switch over to value-stocks which have been beaten down over the past few months. This is evident when one looks at the performance of the US tech-laden Nasdaq and the more traditional Dow Jones Index over the Nov 6 to Nov 16 period since the Pfizer announcement (Chart 1).
Chart 1: Since the Pfizer announcement, the Dow Jones Index has outperformed the mighty Nasdaq
Over the short-term, it does seem that from both a technical and momentum perspective, the present equity market rally may have some legs to move higher. In the case of the S&P500 we have it breaking higher after a 2-1/2 months consolidation between 3200-3600. Such a breakout from what looks to be a text book technical pattern called a triangle, is expected to herald in a 400 point move to 4000 (from 3600) for an approximate 10% gain from Nov 16 levels (Chart 2).
Chart 2: S&P500 looks set to extend gains after recent breakout
There are two things working in the market’s favour at this point: excess money sitting by the sidelines and the calendar effect.
Firstly, since March’s violent sell-off that caught many off-guard, investors have reacted by keeping a relatively large amount of money by the sidelines. As the overall situation improves, it is likely that some of this liquidity will be redeployed back into the market.
(Chart 3)
Secondly, the US equity markets are heading into a traditionally strong period. Over the past 10 years, on a seasonal basis, November has been the strongest month in the year. While December has been a bit of a lull period on a seasonal basis, January and February have been strong months. These patterns can be attributed to fund managers and investors in general who rebuild their positions in November after going into October (which is historically is bad month for markets) on a somewhat neutral footing. December has traditionally been a quiet month given the festive holidays and the reluctance of many fund managers to trade actively amid the thin liquidity and as they would have closed their positions for the year. However, activity has traditionally picked up again in January and February as fund managers position themselves for the new year. Expect this to remain the case as we head into the Dec-Feb period, and in fact, don’t be surprised if December turns out to be a strong month also as fund managers look to re-build their defensive portfolios back to a neutral position ahead of the year-end.
Chart 4: US S&P500 Index Seasonality
We had in late October presented to our clients the following diagram which encapsulates a lot of what has been presented in the prior paragraphs.
All said, does this mean it is all clear ahead? Not really, in our opinion. While things are looking up over the next few months, investors must realize that all of this comes amid a structurally weak global economy. We expect many countries to continue struggling with the economic repercussions of COVID19 as unemployment and corporate defaults rise sharply over the coming months and even throughout 2021. Many countries will officially enter into a recession in 2021, if they haven’t already done so, mainly as a result of deleveraging by households and corporations alike. Sharply reduced corporate profitability, continued deflationary pressures, excessive debt all round etc are all likely to continue to weigh on economic growth.
In our opinion, we are presently experiencing an overall cyclical topping out (of the present cycle which has already lasted more than 10 years), instead of a cyclical upturn that will see markets continue back on the trajectory that they were on pre-Covid19. That doesn’t mean there will not be opportunities over the short-term as the case it presently but investors should always bear in mind that we are likely at the present cycle’s last inning rather than at the start of a new cycle. -/-
Disclaimer: Mr Sani Hamid is a Director (Economy & Market Strategy) with financial advisory firm Financial Alliance and a Certified Financial Planner. He contributes to www.halaluniverse.net on a regular basis. The information in this article are for educational purposes only and not to be construed as financial advice. Investors should seek advice from a financial adviser before investing.
