In 2020, it’s just another week for a global market machine that has managed to continue to weather some of the biggest shocks in economic history.
If global stocks end November with the biggest monthly gain since the late ’80s, investors can rationalize it with the good news: A vaccine is getting closer every day. The process of transitioning to a new US president has begun and Joe Biden’s choice for Treasury secretary is known and trusted.
But the danger is that all of this year’s drama has desensitized the investing world, leading to a record-breaking rally regardless of the fundamentals. Complacency, not COVID-19, could be the new threat to returns.
“The markets are still looking to the future and are currently poised to consider the negative news in the short term, knowing that a strong economic recovery looks much more assured following the recent vaccine news,” said Rupert Thompson, director of vaccines. investments at Kingswood Holdings. Along with the belief that central banks will do whatever is necessary, this means greater resilience to shocks, he said.
A desperate-defying Wall Street rally on Main Street has been a hallmark of the pandemic roller coaster. The difference now is that the rebound is being fueled by a wider range of companies rather than a few tech giants – and potentially a lot more money.
More than US $ 77 billion was invested in publicly traded funds in the United States in November, of course for a record. This helped keep the three major U.S. stock market gauges at their all-time highs at the end of a week in which jobless claims jumped unexpectedly, incomes plummeted and the rate of coronavirus infection s ‘is accelerated.
The MSCI All-Country World Index added 2.3 percent. The Stoxx Europe 600 index gained a fourth week. All the while, virus cases have surpassed 60 million globally and lockdown measures have been extended in some of the world’s largest economies.
“The short-term risk to growth and risky asset prices remains acute,” BCA Research strategists wrote in a note. “US economic activity is slowing even before tougher controls are imposed to prevent a collapse of the US healthcare system.”
Despite this, the rally continues, with most bets placed on assets highly exposed to the economic cycle.
Of course, investors are reporting better economic news in 2021. But at this rate, the positive news will translate into diminishing returns.
For example, on November 9, Pfizer Inc.’s announcement that its vaccine had a success rate of over 90% caused the Dow Jones Industrial Average to jump 3%. Moderna Inc.’s 94.5% success a week later resulted in a 1.6% lead.
Maybe the prospect of a vaccine was enough, with investors adjusting for the majority of the good results after that first title. But these moves suggest a market that is potentially immune to even positive news related to the pandemic.
“The high valuations of both fixed income and equities means a lot of good news is already embedded,” Thompson told Kingswood.
The bullish conviction can be explained by another record set this week: the easiest financial conditions in history, which encourages investors to gorge themselves on risk everywhere.
Yields on lower-rated junk bonds hit their lowest level since 2014, even after the Treasury-Federal Reserve showdown and the central bank’s reduced ability to support the credit market.
The Cboe volatility index is back to its lowest since February, while a measure of bond volatility is not far from being the lowest on record. West Texas oil surged above US $ 45 a barrel for the first time since March in hopes of rising demand. The Russell 1000 Value Index is expected to beat the Russell 1000 Growth Index for the third consecutive month.
For all of these indicators of a strong appetite for risk – perhaps because of them – there remain small pockets where the prudent investor can be seen. The yield on 10-year treasury bills appears to be well anchored below 1%. Demand for high-quality debt saw the global negative yield bond stock hit a record US $ 17.5 trillion this week.
Meanwhile, a surprisingly large cohort is still behind on the equity part. While discretionary managers are over-stretched based on fundamentals, according to Deutsche Bank AG, systematic traders have kept their exposures low.
All the more reason to be optimistic, according to Citigroup Global Markets.
“One of the unappreciated risks to asset markets in the coming months could be a merger of stocks,” macroeconomic strategists, including Amir Amin, wrote in a research note. “Our measures suggest a light positioning, in conjunction with a mix of potentially potent risk appetite, including: a loose Fed, further fiscal stimulus in the US and further acceleration in improving labor markets . “