Drama, Drama, Drama

Despite election drama, transition drama, and a presidential change, the market has still strongly rallied. Is there a disconnect between the economy and market?
 
This was the topic for Common Sense this week. Coincidentally, I noticed that a friend of mine (CNBC anchor Kelly Evans) wrote an article that covered this exact topic. I think her comments summarize the disconnect. Here is some of what she wrote:

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Begin quote:

Kelly Evans: The stock market-Covid disconnect 

“Indeed, the Covid news over the past two weeks has only gotten worse. Not only are cases spiking, but hospitalizations are too. “We need to start discussions about how we preserve health system capacity,” former FDA head Scott Gottlieb tweeted yesterday, especially given that this time around “it will be harder to backstop hospitals given how distributed the pandemic is.” 
 
To my ears, that sounds like shutdowns. (Although that’s not what Gottlieb is recommending.) Shutdowns sink the economy, markets crater again as they price that in, etc. So why isn’t that happening? The S&P 500 is up 172 points, or 5%, since the close on that Monday, Oct. 26. 
 
So again, why is the market so resilient? A few obvious differences between now and March come to mind: 

• We haven’t seen lockdowns yet. Yes, states are restricting dining and gatherings, but nothing on the scale, at least so far, of what happened this spring. 
• We’ve been here before; this summer we had almost the exact same spike in hospitalizations (see below) without slowing the economy’s reopening rebound.
• The Fed. If you want to know just how massive their stimulus already has been, read Tuesday’s piece. It’s why Larry Lindsey, on our show way back in July, said the S&P would hit 4000 next year--well before the deluge of strategists this month have come to the same conclusion. 
• The “excess savings” from the CARES Act are still padding consumer balance sheets on net, which is one reason retail analysts are relatively positive about the holiday shopping season. 
• The vaccine is coming. Or perhaps multiple vaccines; Moderna last night said that ironically, the spike in cases has helped it reach enough data in its own vaccine trial to begin analysis, meaning we’ll hopefully get results soon. 

So that’s how you get a market that keeps rallying in the face of worsening Covid news. There has been a reversal in the leadership, however; after value outperformed growth by the most on record in the days around the election, now growth is back in the leadership as the tech-heavy “stay-at-home” trades resurge. And even the most bullish strategists like Michael Darda think we’re starting to enter the range of fair value already for the S&P."

End quote

Source: November 12, 2020, Written by: Kelly Evans, CNBC.com
https://www.cnbc.com/2020/11/12/kelly-evans-the-stock-market-covid-disconnect.html 

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Don't Get Overly Enthusiastic

We continue to believe that it is important not to get too enthusiastic despite market rallies as there is more difficult economic news ahead (particularly if there is a delay in the stimulus package or a broad shutdown). While one might be tempted to be very aggressive, we think it makes sense to invest with some degree of caution and that is how we position portfolios. That is the case with our equity assets as well as our fixed income positions.
 
We will continue to monitor conditions and news. Believe me when I say this; 2021 will be just as uncertain as 2020. Let's recognize that the world we live in is rapidly changing and that's not going to stop even after the vaccine is brought under control.