Macro Market Conditions - December 15 2020
We are now half-way through the month of December, and firmly approaching the end of 2020- a tumultuous and turmoil-filled year. However, despite the gloomy reality on the ground, Pfizer’s vaccine roll-out continues in the U.S. and worldwide. More vaccines may be coming in the near future as well. In the U.S., FDA staff announced on Tuesday (Dec. 15) that they endorsed emergency use of Moderna’s Covid vaccine. The FDA’s vaccine advisory panel will also meet Thursday (Dec. 17) and will decide whether to recommend official emergency use clearance. Upon authorization, government officials plan to ship nearly 6 million doses of Moderna’s vaccine on top of the initial 2.9 million Pfizer doses already in distribution.
While markets surged in November due to election relief and vaccine optimism, sentiment in December has been somewhat more muted and mixed. What is concerning investors the most right now is the lack of an economic stimulus to combat reimposed shutdown measures. The longer it takes for a stimulus to pass, the worse off the markets and the American economy will be. Especially with many unemployment benefits set to expire at the end of the month. While Democrats and Republicans still remain deeply divided on certain matters, a two part bipartisan stimulus plan proposed on Tuesday (Dec. 15) may be the formal thawing of the ice that we so desperately need. This $908 billion plan would be split into two parts. The first part will be a $748 billion stimulus with an additional $300 per week in federal unemployment benefits and another $300 billion for more PPP loans. The second segment will be a $160 billion bill, and will include the more partisan issues of business liability protections and financial aid to state and local governments.
Despite the short-term headwinds, one trend has remained constant- the outperformance of small-cap stocks.
The small-cap Russell 2000 index continues to shock and awe. Although the Russell index is composed mostly of small-cap value cyclical stocks dependent on the recovery of the broader economy, and may be more adversely affected on “sell-the-news” kind of days, its hot streak since November has not cooled off.
Since the start of November, the Russell 2000 has skyrocketed and considerably outperformed the other major indices. Just look how the iShares Russell 2000 ETF (IWM) compares to the ETFs tracking the Dow, S&P, and Nasdaq in that time frame. Since November, the IWM has risen over 24%. This is at least 12% higher than all of the other major indices.
The trend has not slowed even a little bit. Since the start of December, the Russell ETF has outperformed the other ETFs between 4%-5%.
Furthermore, even though the week ended December 11th was an overall down week, the Russell 2000 STILL managed to outperform the larger indices and eek out another weekly gain of 1.02%.
The Russell’s performance is especially encouraging because it shows that investors believe that an economic recovery will be robust and comprehensive in 2021. Remember- because the Russell consists of so many small-cap cyclical stocks dependent on the recovery of the broader economy, it bodes well for the long-term economic sentiment. When tech led the rally between April and the end of October, it was largely because of “stay-at-home” stocks keeping our world afloat. With Russell stocks leading the way now, this is an entirely different sector that the public is betting on now.
Be wary though that there is still a multitude of short-term headwinds. COVID will not disappear before 2021 starts and could be here with us a little bit longer. The virus is as bad as ever and continues to hit record highs in both new cases and daily deaths. These rising infection rates and re-imposed shutdowns also do not bode well for the economy- especially without a stimulus.
In fact, according to Blackrock, these restrictions will cause a mild GDP contraction in Q1 2021. This contraction however could be even worse than predicted if these stimulus talks continue to drag on and on. Worse- a risk of permanent economic scarring rises considerably as well.
There is truly so much uncertainty right now. This recession may last longer than we think. Or, the economic recovery may be sharper and quicker than anticipated. If these vaccines are scalable and safe, and rolled-out to perfection, this short-term market volatility may be worth monitoring for mid-term and long-term opportunities to bet on a full economic rebound by the second half of 2021. Time will tell.
Keep in mind that markets are emotional beings and can be swayed by short-term news and sentiment. However, in the broader scheme of things, these are forward-looking instruments and investment vehicles that look 6-12 months down the road. Remember how sharp and swift the rally was after the crashes in March. Since markets bottomed on March 23rd this is how the ETFs tracking the indices have performed: Russell 2000 (IWM) up 92.83%. Nasdaq (QQQ) up 78.94%. S&P 500 (SPY) up 64.94%. Dow Jones (DIA) up 62.50%. Markets long-term always end up going up and are focused on the future rather than the present.
