“Good investors gather information, put that information into current and historical context, then make sound decisions.”
There are numerous cycles and trends that impact financial markets. Some are fleeting and some are long-term. We have just completed an election cycle and are wrapping up a calendar cycle. Cycles generally are subservient to trends, which can run for many years, through many cycles. Then we have seasonality. Seasonality is generally limited to a few contiguous months that have historically demonstrated repeatable patterns. One of the most popular is the November-December-January season, which has historically been the most profitable three-month season for equity investors. This year’s season has been exceptional.
In November, the S&P 500 Index rose +10.95%. So far in December, the S&P 500 Index has risen by another +3.25%. January’s tale is yet to be told, but there is a lot of room either way after November and December’s strength. This has surprised a lot of investors because we have just completed an election cycle that was full of dire threats and hollow forecasts of what would happen if the ‘wrong team’ won. The lesson here is that seasonality reigns over election cycles, which are the most fleeting, yet subject to the most fanfare. It is another demonstration of who is actually in charge of financial markets, politicians or institutional investors.
Undoubtedly, the availability of COVID vaccines had a huge impact on equity markets in November. The news couldn’t have come at a better time with the Thanksgiving surge of cases and deaths, and the anticipated Christmas surge. Hopefully, the next several months will once again reflect lower numbers due to increased social distancing. The timing of vaccine distribution and its impact on new cases will probably not become evident until the second half of 2021.
The push in equities during December has been broad-based. Only the Dow Jones Utilities Average has lost ground during the month, down -1.19%, to stand at -0.28% YTD. The strongest performances have been seen in the small cap and mid cap sectors. The S&P 600 Small Cap Index is up +8.85% in December, up +11.83% YTD, and the S&P 400 Mid Cap Index is up +6.61% in December, up +13.76% YTD. Large cap stocks are taking a back seat for the first time this year, with the S&P 500 Index up +3.25% in December, but up +17.72% YTD. In December, the leaders in the S&P Composite 1500 were the Information Technology Sector Index, up +6.28%, the Financials Sector Index, up +5.19%, and the Energy Sector Index, up +4.55%.
High yield bonds have also enjoyed a good seasonal push, with the Bloomberg Barclays U.S. Corporate High Yield Bond Index up +3.96% in November and up +1.75% in December. Meanwhile, investment grade bonds have been much quieter, with the Bloomberg Barclays U.S. Aggregate Bond Index up +0.98% in November and off -0.04% in December. Year-to-date the U.S. High Yield Bond Index is now up +6.97% and the U.S. Aggregate Bond Index is up +7.32%. The Bloomberg Barclays Municipal Bond Index is up +5.19% YTD.
The vaccine news pulled European equity markets out of a deep hole. The MSCI Europe Index gained a huge +17.01% in November. It’s following through in December with a gain of +4.44%, and now is up +5.11% YTD. The MSCI Emerging Markets Index also enjoyed big pushes in November, up +9.25%, and December, up +4.00%. It is now up +14.61% YTD. Volatility aside, it has been a good year for investors in U.S. and global financial markets. The important thing was to avoid getting caught up in the first half COVID hysteria and the second half election madness. It bears repeating that long-term investors are successful because they have a long-term perspective and can ‘look through’ the crises depicted on the nightly news. See you next year!
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.