We emerge from the holiday hopeful for a Season of Goodwill in markets, but ready for any last surprises that 2020 might have in store.

For Americans at home and abroad, this was one of the strangest Thanksgivings in recent memory, at the tail-end of the toughest of years.

A holiday that is all about reconnecting with family was marked, by many of us, with small gatherings in isolation “bubbles,” as we sought to protect older relatives and prevent spreading the coronavirus.

And so, while there is now growing belief that we will be back in our “planes, trains and automobiles” by this time next year, visiting our folks, vacationing, commuting and catching up with clients, it’s hard to miss that we are still in the thick of a pandemic.

It’s the same dichotomy that we’ve been discussing in our views for the economy and asset allocation.

Good Cheer

As Joe Amato wrote last week, our Asset Allocation Committee (AAC) held a mid-quarter meeting to reassess those views in the light of the U.S. election and clinical trial results from two coronavirus vaccines. Political and pandemic risks had been the two near-term factors offsetting our more positive views on risk assets over the 12- to 18-month horizon.

Even since Joe commented, the seasonal good cheer has continued to come in.

After three weeks of uncertainty, the outgoing U.S. administration is now ready to coordinate with and make resources available to President-elect Joseph Biden and his team. That should not only ease the transition, but possibly also improve the chances of a fiscal stimulus agreement—there were reports last week that Biden is urging a compromise with Senate Republicans. News that Janet Yellen is headed to the Treasury was also greeted positively by investors.

On the vaccine front, a third success was added last week: although the effort from AstraZeneca and Oxford University appears slightly less effective than the two mRNA-based shots, it can however be stored at normal refrigerator temperatures, greatly enhancing its distribution potential.

Vulnerable to Shocks

This has all sent the S&P 500 Index surging back through new highs in November.

That in itself is a reason for caution. How much further can earnings multiples expand, given the rock-bottom level of real interest rates?

Fundamental risks remain alive, too. Much U.S. economic data has been strong. Purchasing Managers’ Indices (PMI) far exceeded expectations last week, against a mixed bag of European data.

But that superior economic performance may have been bought with a looser attitude toward coronavirus infections: hospitalizations are setting new records in lockstep with the S&P 500. After a month of declining initial jobless claims, a sharp uptick has raised questions about how sustainable this approach is.

Meanwhile, Treasury Secretary Steven Mnuchin has asked the U.S. Federal Reserve to end its credit support programs and return funds to Congress. Credit markets seem unfazed so far, but it may render them more vulnerable to shocks over the coming weeks.

Finally, in Europe, expectations for a post-Brexit trade agreement remain high even as the clock ticks ever closer to midnight, and there has been opposition to the terms of the European Union’s joint recovery fund from Poland and Hungary. Many countries are just starting to get on top of the second wave of the virus with measures that are potentially negative for fourth-quarter GDP.

Balance Remains in Order

Putting it all in the balance, the AAC ultimately decided to maintain its most recent views. We remain positive on equities and credit over government bonds, with a moderate bias toward economically sensitive assets such as small caps, European and Japanese stocks, high yield, emerging markets debt, China bonds and commodities.

An underweight view on U.S. large caps largely reflects stretched valuations in defensive parts of the market, while a neutral view on emerging equities reflects our concerns about the relative impact of the COVID crisis on countries with less robust health systems and weaker financial resources.

November has provided many reasons for a heartfelt thanksgiving. December, with its traditions of goodwill and strong stock market returns, lies ahead. But we are still in the midst of a pandemic, and 2020 has already served us a feast of shocks, surprises, violent market rotations, liquidity crunches and bouts of volatility. We think an optimistic but balanced portfolio remains in order.

In Case You Missed It

  • Eurozone Purchasing Managers’ Index: -4.9 to 45.1 in November
  • S&P Case-Shiller Home Prices Index: September home prices increased 1.2% month-over-month and increased 6.6% year-over-year (NSA); +1.3% month-over-month (SA)
  • U.S. Consumer Confidence: -5.3 to 96.1 in November
  • U.S. Durable Goods Orders: +1.3 % in October (excluding transportation, durable goods orders increased 1.3%)
  • U.S. 3Q2020 GDP (Second Preliminary): +33.1% quarter-over-quarter annualized rate
  • U.S. Initial Jobless Claims: +778,000 for the week ending November 21
  • U.S. New Home Sales: -0.3% to SAAR of 999,000 units in October
  • U.S. Personal Income & Outlays: Personal spending increased 0.5%, income decreased 0.7% and the savings rate decreased to 13.6% in October

What to Watch For

  • Monday, November 30:
    • China Purchasing Managers’ Index
  • Tuesday, December 1:
    • Eurozone Consumer Price Index
    • ISM Manufacturing Index
  • Thursday, December 3:
    • U.S. Initial Jobless Claims
    • ISM Non-Manufacturing Index
  • Friday, December 4:
    • U.S. Employment Report

– Andrew White, Investment Strategy Group

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