COVID-19 trends are getting worse, and cash isn’t doing investors any favors. How should you navigate markets in the months ahead?
Our Top Market Takeaways for November 20, 2020.
The light and the tunnel
The encouraging vaccine news from Pfizer/BioNTech and Moderna seems to have investors seeing the light at the end of the tunnel:
- Earlier this week, the S&P 500, the Dow Jones Industrial Average and Russell 2000 all hit all-time highs.
- Same with the materials, industrials, staples and healthcare sectors. And Taiwanese stocks. And semiconductors.
- Last week, offshore Chinese stocks hit an all-time high.
- U.S. 10-year Treasury yields are at the top end of their COVID-era range, while the VIX is at its COVID-era lows.
- Brazilian stocks are at their highest since July.
- European stocks are at their highest since March.
- U.S. high yield spreads are at their tightest since February.
- Emerging market stocks outside of China are at their highest since January.
- The renminbi hasn’t been this strong against the U.S. dollar since before the first tariffs on Chinese imports went into effect in 2018. Same with copper.
- Onshore Chinese stocks haven’t been this high since 2015.
- Japan’s Nikkei hasn’t been this high since 1991.
- Even European banks (!) are up +30% since Halloween.
But we are still in the tunnel:
- Yesterday, the United States reached the grim milestone of more than 250,000 COVID-19 deaths.
- New York City schools are closing down in-person classes to forestall a second wave in the city.
- Hospitals are overflowing in El Paso.
- North Dakota has one of the worst outbreaks in the world.
- Much of Europe remains under “lockdown” or “lockdown-lite,” and tensions are rising.
- Consumer spending (as measured by both official and alternative sources) is softening.
- Millions of workers could lose unemployment support next month without another fiscal package. The chances of getting one in the lame duck session seem about as slim as the 49ers making a repeat appearance in the Super Bowl.
But markets can’t catch COVID-19, and they don’t need the stimulus as much as laid-off workers do. They can start to reflect the benefit of the vaccines long before you or I will feel that pinch in the arm and the world gets back to normal, and they have the luxury of being able to wait and see if the new government cements the recovery with another stimulus bill early next year. We think investors may be rewarded as we make our way through the tunnel and into the light. We will get there, eventually.
Why invest excess cash now?
In 2020, there has been no shortage of reasons not to invest—the age of the economic cycle, an unprecedented pandemic-induced recession, uncertainty around the U.S. elections, and now, perhaps, the distraction of the holiday season. To us, the best time to get invested (of course, in a way that aligns with your goals) was yesterday. We believe the second best time is today. Not convinced? See some of our answers to the most common questions that we hear.
Shouldn’t I wait for a pullback to get a better entry point?
In our view, no—time is an investor’s most powerful ally. As good as it feels to “buy low and sell high,” history tells us that investors have actually been better off when they’ve consistently added market exposure rather than accumulating cash to invest on pullbacks.
To illustrate: Assume you save $1,000 every month and your ultimate intention is to invest it. You can either  add that $1,000 to a 60% stock/40% bond portfolio allocation at the end of each month, or  keep it in cash and let the savings accumulate to invest each time there’s a 10% drawdown in the S&P 500. As shown in the chart below, the strategy that consistently contributed to the 60/40 portfolio each month has outperformed the wait-for-a-drawdown strategy to the tune of $350,000 over the course of 30 years. It’s about time in the market, not timing the market.
Isn’t the stock market overvalued?
It might seem that way—at least if you’re only looking at P/E multiples. The S&P 500 is trading at a 21.9x forward earnings multiple (versus 25-year average of 16.5x); the MSCI World is 20.5x (versus 25-year average of 16.2x). Not exactly cheap…
But relative to bonds, stock valuations are not stretched. More than 70% of the stocks in the MSCI World have a dividend yield greater than the 0.89% yield-to-maturity offered by the Global Aggregate Bond Index, one of the highest readings on record. Taken as a whole, as shown in the chart below, the dividend yield of the MSCI World Index is currently 1.16% higher than the yield on the Global Agg Bond Index.
Easy central banks mean that interest rates around the world are likely to remain low for the foreseeable future. Add our expectation that the global economic recovery will help drive a continuation of the stock market rally, and current valuations don’t seem all that unreasonable. As we discussed a couple months ago, investors may be better off resetting their expectations around what constitutes “high” stock market valuations.
Well, okay, but you also said last week that secular growth is still one of your top ideas. Isn’t that going to fall out of favor as the recovery broadens out?
Market price action in the wake of better-than-expected vaccine news has favored pandemic laggards: S&P 500 Value has gained +5.5%, while S&P 500 Momentum names have lost -4.4% since Pfizer’s announcement last Monday morning. Given that a number of “growthy” companies fall in the momentum category, it’s worth making a distinction:
- We see tactical opportunities in some cyclical areas of the market, and we’re positioning accordingly. The portfolios we manage have overweights to sectors such as financials—which are trading at low valuations and still holding excess capital from the recessionary environment—and industrials. In particular, machinery could benefit from inventory replenishment and potential infrastructure spending. For those looking for opportunistic trades, we’ve been highlighting select opportunities in homebuilders, transports, and travel and leisure.
- Over a multi-year period, however, we still think secular growth is one of the best games in town. That opportunity set is defined by high-quality companies with durable earnings potential, competitive advantages and innovative streaks.
- There is much more to digital transformation than the “big five” FAAMG stocks. We’re seeing tech-enabled disruption across a variety of sectors, and the opportunity to invest in the tech sector itself at cheaper valuations through emerging markets (EM) looks compelling (EM tech is trading at a 16.9x multiple versus S&P 500 tech at 26.4x).
- Healthcare innovation is changing the way we treat disease in the long run, and the sector is trading at a discount. Further, the global project to find a vaccine could lead to explosive growth in other areas of diagnostics and treatment, given the lessons learned.
- Sustainability isn’t a fad. Governments view it as necessary, and it’s becoming more cost-effective. Don’t fight the long-term inertia: Consider pure-play exposure to clean energy, or look at opportunities related to a variety of environmental challenges—energy, water optimization, food and agriculture, and waste reduction and recovery.
Said another way, our highest-conviction ideas depend on an investor’s time horizon. In the months ahead, we think it’s prudent to have some exposure to catch-up trades in downtrodden cyclical names (although selectivity is key—COVID-19 risks are still present, and we’re wary of value traps in companies that are cheap for long-term, structural reasons). Over a multi-year period, we view secular growth as the engine of capital appreciation in a world where forward returns are expected to be lower than in the past.
Financial hygiene is as important as ever, and in our view, getting out of excess cash and into the market is one of the first steps to take in cleaning up your portfolio.
All market and economic data as of November 2020 and sourced from Bloomberg and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
- Past performance is not indicative of future results. You may not invest directly in an index.
- The prices and rates of return are indicative, as they may vary over time based on market conditions.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.