November 2020: Global Equity Markets Review
Stocks in November turned in their best performance since April following the dramatic decline at the onset of COVID-19.
It was also the best November monthly return in decades as optimism over vaccine progress and a post-election boost raised hopes for a return to a more normal life. The below chart illustrates the monthly November returns since 1928. Overall, the returns witnessed by investors in November occurred only four other times and in less than 3% of the time across all months.
A more substantial observation than a seasonal pattern is the dramatic bounce in small stocks. The second chart illustrates the Russell 2000 Index of small stocks since 1995. The November return was the best return since index inception. Investors’ increased appetite for equity exposure most levered to a rebound in economic activity spilled over into value stocks. The value style category was hit hard by the impact of COVID-19 so broader market participation in both small and value stocks is an important affirmation of investor willingness to look forward to a better economy.
Not surprisingly, the global pandemic has increased correlation in equity markets around the world. Depressed valuations in non-U.S. equity markets were partially unwound in November as international indexes outpaced the returns generated domestically. The coordinated efforts by central banks and governments to offset the impact from COVID-19 should be more evident as the positive outcome of unprecedented stimulus becomes more visible. Developed market indices outpaced the U.S. market by the widest margin in almost 2 years – an important signal in an environment when global markets were rallying. This is a critical pattern to unlocking further valuation disparities that still exist in favor of non-U.S. markets. The dollar has also resumed its downward trend of late which has aided international returns for U.S. investors.
Despite the positive review detailed above, we remain concerned the optimism is clearly discounted in current market prices. The high valuation on stocks is a combination of rising prices but also earnings estimates which remain well below beginning-of-year forecasts.
High expectations required to support the current valuation in stocks is confirmed by investor activity in stock options. The below graph illustrates the ratio of put to call options in individual stocks measured over rolling 20-day periods. Put options are indicative of negative short-term sentiment on a stock while call options are indicative of positive short-term sentiment. A rising ratio illustrates the willingness of investors to buy downside protection as was evident in March near the market bottom. Today the ratio stands in stark contrast to March and is at a 17 year low as investors shun downside protection in exchange for upside opportunities.
Optimism is a vital input to a better economic environment; however, investors should remember expectations can change much more quickly than growth rates in the global economy. Development of multiple vaccines for COVID–19 notwithstanding, infection rates have accelerated, and renewed restrictions are being put in place around the world. The coming weeks will be critical in providing underlying support to investor expectations. High valuation on stocks means the possibility of disappointment and downside risk in equities should not be easily dismissed. We expect more encouraging news of an effective vaccine may well support a good finish to 2020 but remain wary of one-sided arguments where only positive outcomes are considered.
Important Notes and Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 11/30/2020 for the period indicated. “YTD” refers to the total return as of prior-year end, while the other returns are annualized. 3-month and annualized returns are shown for:
- The S&P 500 index is comprised of large capitalized companies across many sectors and is generally regarded as representative of US stock market and is provided in this presentation in that regard only.
- The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance. The S&P 500 equal-weight index (S&P 500 EWI) series imposes equal weights on the index constituents included in the S&P 500 that are classified in the respective GICS® sector.
- The S&P 500 Growth Index is comprised of equities from the S&P 500 that exhibit strong growth characteristics and is weighted by market-capitalization.
- The S&P 500 Value Index is a market-capitalization weighted index comprising of equities from the S&P 500 that exhibit strong value characteristics such as book value to price ratio, cash flow to price ratio, sales to price ratio, and dividend yield.
- The Russell 3000 Index tracks the performance of 3000 U.S. corporations, determined by market-capitalization, and represents 98% of the investable equity market in the United States.
- The Russell Mid Cap Index measures the mid-cap segment performance of the U.S. equity market and is comprised of approximately 800 of the smallest securities based on current index membership and their market capitalization.
- The Russell 2000 Index is a market-capitalization weighted index that measures the performance of 2000 small-cap and mid-cap securities. The index was formulated to give investors an unbiased collection of the smallest tradable equities still meeting exchange listing requirements.
- The MSCI All Country World Index provides a measure of performance for the equity market throughout the world and is a free float-adjusted market capitalization weighted index.
- The MSCI EAFE Index is a market-capitalization weighted index and tracks the performance of small to large-cap equities in developed markets of Europe, Australasia, and the Far East.
- The MSCI Emerging Markets Index is a float-adjusted market-capitalization index that measures equity market performance in global emerging markets and cannot be purchased directly by investors.
- The S&P Global BMI sector indices are into sectors as defined by the widely used Global Industry Classification Standards (GICS) classifications. Each sector index comprises those companies included in the S&P Global BMI that are classified as members of respective GICS® sector. The S&P Global BMI Indices were introduced to provide a comprehensive benchmarking system for global equity investors. The S&P Global BMI is comprised of the S&P Emerging BMI and the S&P Developed BMI. It covers approximately 10,000 companies in 46 countries. To be considered for inclusion in the index, all listed stocks within the constituent country must have a float market capitalization of at least $100 million. For a country to be admitted, it must be politically stable and have legal property rights and procedures, among other criteria.
- The Barclay’s US Aggregate Index, a broad-based unmanaged bond index that is generally considered to be representative of the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
- The Bloomberg Barclay’s US Corporate High Yield Index, which covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Index performance used throughout is intended to illustrate historical market trends and performance. Indexes are managed and do not incur investment management fees. An investor is unable to invest in an index. Their performance does not reflect the expenses associated with the management of an actual portfolio. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Past performance is no guarantee of future results.
Key Indicators correspond to various macro-economic and rate-related data points that we consider impactful to equity markets.
- The US 10-Year Treasury Yield (%)/bps, is the return on investment for the U.S. government’s 10-year debt obligation and serves as a signal for investor confidence.
- SPDR Gold Trust Price ($), is an investment fund that reflects the performance on the price of a gold bullion, less the Trust’s expenses.
- West Texas Intermediate, which is an oil benchmark and the underlying asset in the New York Mercantile Exchange’s oil futures contract.
- CBOE Volatility Index (Level)/% Change, which uses price options on the S&P 500 to estimate the market's expectation of 30-day volatility.
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