The election is over. Government is divided as anticipated. The markets like it. The vaccines are here, so the markets can look through the current COVID surge to a brighter Spring for the economy. The Standard & Poor's 500 has traded up toward the top end of its trading range. Shares of companies that will do better when the pandemic is over such as energy, banks, etc. have recently performed even better. In November the energy sector was up 30%, banks were up 20%. The Russell 2000, which is made up of mid-sized and smaller companies, had its best month ever, rising some 20%.
Speculation has returned with renewed energy. Initial Public Offerings and so-called SPAC's are soaring. High Yield bonds (junk) have risen to pre-COVID levels, yielding just 5%. Safe havens such as the dollar and gold have pulled back. The dollar sits at a two year low. Emerging Market stocks have surpassed their pre-COVID highs. The Investors Intelligence Survey reports over 60% Bulls and only 17% Bears. The last time the markets were this perky was January 2018, just before a serious correction.
In another sign of overheating, Standard & Poor's has decided to add Tesla to the S&P 500 at year-end. Tesla has an astounding $550 billion market value making it one of the largest companies in the index. General Motors has a market value of $60 billion. Technology is already 40% of the index. Adding the very volatile Tesla shares right at the top would not be unlike the bureaucrats at S&P. In addition, Tesla will be put in the consumer discretionary sector of the index where it (8%), along with Amazon (21%), will be some 30% of consumer discretionary ETF's.
Happy Days are obviously here again!
But, I would take care of adding new money to stocks in the near term. The S&P 500 is up double digits year to date, as are emerging markets. Large foreign company stocks have also had a good run. December is a seasonably strong part of the year. But, in years when November is great, December is pretty flat. I believe there will be a catch-up move for some of the laggard groups like real estate, banks, and energy. It has likely begun now that tax-loss selling is about over. It should last through mid-January. That will keep the averages up. But, the risks of a correction in February are high.
Speaking of tax-loss selling, regardless of the outcome of the Georgia Senate runoff next month, expect tax rates on capital gains and dividends to go up next year under the new administration. You might want to book gains this year and book losses next year if you want to be clever.
Bonds are still terrible investments except for closed-end municipal bond funds which are still throwing off 4% tax-free distributions. With higher taxes likely, they look better than ever. Now that gold has pulled back from its “overbought” status, I believe it is safe to add to positions, especially in light of the ongoing weakness in the dollar. Gold would also be a good hedge in the unlikely event that the Democrats win both Senate seats in the Georgia runoff and take total control of the government. Such a result could easily lead to a 20% decline in the S&P 500.
Next month we will review our forecast for this year and make our fearless forecast for 2021. It should be fun!
A note from WSC and WAMI . . .
Robert C. Davis is a Chartered Financial Analyst and is affiliated with Woodlands Asset Management, Inc. as a consultant. Founding partner of Davis Hamilton Jackson and Associates, a Houston-based investment advisory firm; Bob is now retired and living in Chappell Hill, Texas. He now lends his expertise and knowledge of the markets to our company and customers. We hope you find it interesting and insightful.
Woodlands Securities Corporation, Member FINRA, and SIPC
Woodlands Asset Management, Inc.
10655 Six Pines Drive, Suite 100
The Woodlands TX 77380