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November 2020 Monthly Review

"It's a Mad, Mad, Mad, Mad Market"

By Loyd Johnson, Chief Investment Officer
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Loyd Johnson PhotoA Look Back

I am almost certainly dating myself beyond repair, but the above title references the comedy classic, It’s a Mad, Mad, Mad, Mad World, released in 1963. It featured an all-star cast which included Spencer Tracy, Milton Berle, Sid Caesar, Ethyl Merman, Buddy Hacket, to name a few. There was even a cameo appearance from the Three Stooges. It follows the madcap pursuit of $350,000 in stolen cash by a group of diverse and colorful strangers. The film was a critical and commercial success and was nominated for six Academy Awards.

The seemingly “crazy” disconnect we have seen this year between the financial markets and the underlying economy has been…in a word, mad. The S&P 500, the bellwether large-cap domestic index is on pace to nearly double its long-term historical average. After a very strong rally over the last three months, small-cap stocks are also in the double digits for the year, with a 10.41% return. Traditional Fixed Income has also performed extremely well over the last eight months, as the Bloomberg Barclays Agg is up over 7%.

All of this in the middle of a global pandemic, and the extra-strong November performance coinciding with perhaps the most troubling virus statistics to date. What to make of all this? On one hand, we did have a fairly quick and severe decline in February and March in the initial stages of the Coronavirus and the resulting lockdowns across the globe. Job losses and business shutdowns were the likes never seen before. We had a -31% GDP number reported for the second quarter in the U.S.

However, after that early decline, markets have rallied to recoup the losses and then some. In fact, we closed November just a percent off of all-time highs and have already made new highs in the first several trading days of December. We will delve more into all of the various factors for what we have seen in the markets this year in our fourth quarter wrap-up, but strangely, we believe one of the main drivers of the rally has been the resulting response to the Coronavirus itself.

In early March the Fed took the Fed Funds rate from 1.6% to zero, making money as easy to get as it ever has been. In addition, they also reversed their intended strategy and increased their balance sheet from $4 trillion at the beginning of the year to over $7 trillion currently, purchasing distressed securities “as needed” to stabilize markets. The CARES Act passed in March, which included the PPP loan program added another $2 trillion dollars in aid. Further, negotiations are currently happening between the two parties to deliver another $1 trillion in various stimulus packages.

Simply put, there has been a massive amount of money put into our economy with the intent of providing economic and health-related relief. There can be little doubt that the size and relative quickness of the response has helped small businesses and individuals, at least to some degree. The concern is twofold: How much is enough and when does it end?

A Look Ahead

At least two vaccines seem ready for FDA approval and that can/should be a game changer. From a humanitarian standpoint, we certainly hope so. We believe much will depend on the details and how severe the current surge in cases ultimately is. We remain concerned with longer-term valuations, and will look at that in our next piece.

For now, we look to trim equity allocations with these higher valuations to remain fairly neutral. We suspect that volatility will rear its ugly head again without much warning, as we continue to navigate these difficult times. One of the bigger recent concerns about the November elections is mostly behind us, and we will take the current madness for what it is…and remain hopeful for tomorrow.