November stock market returns were for the record books, as the S&P 500 rose nearly 12%, the Dow Jones Industrial Average had its best month since 1987, and the Russell 2000 was up 18% for its best month ever. The announcements of 3 vaccines spurred a rotation into the most economically-sensitive areas of the market, as investors began to see a light at the end of the tunnel for a return to normalcy. The market strength over the past month bodes well for returns over the next 6-12 months in our view. The S&P 500 had one of its best months in history last month, and, although it might be counterintuitive, stocks tend to move even higher after a big month.
I have a positive outlook for stocks over the next year, due to expectations for the reopening process, continued low-interest rates, and the potential for fiscal stimulus to boost the economy as needed. This view also includes the likelihood of a divided government, which probably reduces the chances of aggressive legislative changes that can alter the outlook over the longer term, including tax increases.
I believe that corporate earnings can rebound to at least $170 per S&P 500 share, which leads me to think that the S&P 500 can move higher by 5-10%. However, it would be normal to see equities consolidate in the short-term as they digest the past month’s strength. Concerns over the virus spread have resulted in increased shutdowns, which may result in economic softness in the next couple of months, particularly if we don’t get additional fiscal aid. Given the recent run-up in stocks, we would patiently accumulate stocks with new money and use pullbacks as better buying opportunities. With so much focus on the “recovery” areas right now, don’t forget about the areas that operated the best during the pandemic (i.e. large-cap tech-oriented, health care, and some consumer sectors). Many stocks in these favored areas have been consolidating for the past several months and appear to be near better entry points for the short term.
I like the idea of that barbell-like approach, investing in sectors that can do well in a work-from-home environment, but also in areas that could benefit from a return to “normalcy,” like energy, materials, and travel and leisure. If interest rates continue to rise, long-term bonds are likely a bad investment, so I’d lean toward short-term bonds instead. The US dollar has been weak recently, and that trend looks like it will continue. If it does, emerging markets stocks could be very interesting, and commodities might rise in value, too.
We’re closing in on year-end deadlines, so if you have any capital gain or loss considerations that we should be aware of or charitable gifts to make, I encourage you to take care of these things prior to December 20. Sometimes these things take a few days, especially with many people trying to do this at the same time, so I’d rather end up with a few days to spare than to run out of time.
All of us at Signature Wealth Strategies hope you have a wonderful holiday season, a Merry Christmas, and a Happy New Year! Here’s to hoping that 2021 is a lot less stressful than 2020!