Morning Jog

No Man’s Land

After what seemed like an endless wait, November finally brought us some good news and much-needed clarity about our path forward.

The election is over and notwithstanding the lingering spectacle in D.C. and slim odds of the Democrats flipping both Senate seats in Georgia’s runoff elections, we will have a divided government at least until the midterms in 2022. With Republicans gaining seats in the House and likely keeping control of the Senate, markets were clearly relieved that no side could claim a landslide victory and that some of the far reaching policy and tax proposals from the Biden administration are off the table.

Coming on the heels of the election, Pfizer and Moderna released results of late stage vaccine trials, reporting incredible progress on vaccines that offer near total protection against the virus. On Friday, Pfizer filed for emergency use authorization approval from the FDA and it is possible that some Americans will start receiving the vaccine by year-end.

We can finally see the light at the end of the pandemic tunnel but getting through this last mile will be a challenge.

Record breaking vaccine development speed is still not fast enough. COVID cases are exploding across the country, hospitalizations are at all time high levels and sadly, death numbers are starting to follow suit. States are imposing new restrictions on businesses, bans on social gatherings and closing schools. The CDC is urging everyone to stay home for Thanksgiving.

This tug of war, between future optimism about a post-vaccine era and the current reality of a resurging virus, is on full display in the markets, as the November rally pauses and the “stay-at-home” or “recovery” trades swap leadership depending on the day.  While markets are always forward looking there is an evident recalibration taking place as investors assess the potential impact of lockdowns and consumer retrenchment on the economy versus a more certain path towards ending the pandemic.

October retail sales grew at the slowest pace in six months. Weekly jobless claims are ticking up as we head into December when several unemployment provisions of the CARES Act are set to expire. And the disappointing lack of action from Congress, with a major stimulus bill likely delayed until February, puts many small businesses and the 12 million relying on the extended unemployment benefits, in jeopardy.

These are short-term challenges, as an effective vaccine is now a reality and Congress will get its act together next year to provide fiscal support. The biggest near-term risk for the market is that investors may not be well prepared for the bumps in the road.

Professional fund managers are the most bullish they’ve been all year, buying up stocks and reducing cash levels to 4.1%, a level low enough to prompt BofA to say that it will trigger its contrarian Fund Manager Survey Cash Rule “sell signal” if the trend continues.

Individual investors are equally bullish, although some of the recent optimism has abated this week as COVID cases kept rising.

The directionally bullish stance makes sense. We have a line of sight towards ending the pandemic, central banks remain accommodative and some form of fiscal stimulus will come early next year.  Plenty of cash in money market funds and a scarcity of investment opportunities in fixed income assets will push investors further out on the risk curve and into the equity market.  We just need to navigate through the next few months.

Enjoy your weekend.

Alexander Bass CFA, CFP®
Managing Director
Chief Investment Officer
Nucleus Advisors