Attempting to Bridge the Gap
Global equity markets vaulted to new record highs in the month of November, with the S&P 500 gaining 10.94% on positive news regarding vaccine development and further clarity on the composition of the new administration. Markets also rejoiced at the nomination of former Fed Chair Janet Yellen as Treasury Secretary as she is a known entity and is likely to maintain a fiscally accommodative stance. This is despite several growing potential near-term headwinds including rising infection rates, tighter restrictions in the U.S., and the growing risks of a premature end to key support measures. The momentum in the jobs recovery is beginning to wane, and expiring unemployment benefits threaten to leave households short on critical income support as the latest data on declining personal income attests. This is trickling through to weakening consumer confidence at a point in time when overall growth is highly dependent on household demand. The challenge is whether the momentum in the recovery can carry us through while we wait for broad distribution of a coronavirus vaccine. Close attention will be paid to the November jobs report on Friday as market participants search for evidence.
Conference Board Consumer Confidence - Source: Bloomberg
Markets seem to be looking past these headwinds however with bullish sentiment nearing extreme levels as evidenced by the put/call ratio falling to multi-year lows, and equity and bond volatility indices remaining subdued. In corporate credit, yields for the most speculative of junk bonds, those rated in the CCC tier, fell last week to their lowest levels since 2014 in the continued reach for yield.
CBOE Equity Put/Call Ratio - Source: Bloomberg
ICE BofA MOVE Index (Black), CBOE Volatility Index (Orange) - Source: Bloomberg
Bloomberg Barclays Capital Caa U.S. High Yield Yield to Worst - Source: Bloomberg
Another example of this optimism is in the commodities market where the copper-gold ratio has made a sharp rebound from its lows from earlier this year. This ratio is generally seen as a barometer of overall economic health and risk appetite as the price of copper is tied to global industrial growth, while gold is viewed as a safe-haven asset.
Copper/Gold Ratio - Source: Bloomberg
Risk appetite also seems to be dictating the moves in the U.S. dollar. This risk-on sentiment as a result of vaccine breakthroughs should limit the demand for perceived safe-haven assets such as the dollar. This could signal the continuation of a meaningful decline in the greenback which is expected to depreciate considerably should vaccines become widely available in 2021.
Bloomberg Dollar Spot Index - Source: Bloomberg
Given the exceedingly high expectations and the velocity of the move higher, markets appear vulnerable for elevated volatility in the near-term. It’s imperative that both fiscal and monetary policy support are provided prior to the vaccine rollout. If this can be achieved in conjunction with the vaccine and a divided Congress, it sets the stage for a strong rebound in 2021, and a positive overall backdrop for risk assets. In this environment we favor allocations to both quality and cyclical assets with exposure to ongoing structural growth trends, while remaining wary of over-exuberance in the near-term.
All of us at Edge Wealth would like to wish you a Happy Holiday.
Ryan Babeuf, CFA
Market Strategist
Ryan.Babeuf@EdgeWealth.com
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