Market Update from the Global Asset Allocation Team – December 2020
Optimism flourished in November and global equity markets soared to new highs after some encouraging reports of progress on the vaccine-front, which raised the prospect for an end to the pandemic and emboldened expectations for a rapid recovery in growth. The unveiling of positive efficacy results from three COVID-19 vaccine candidates propelled the market rally and largely overshadowed some worrisome virus trends across North America and Europe. Meanwhile, investors cheered the prospect for a divided U.S. government. All signs are pointing towards a peaceful transition of power to the Biden administration in January, while the nomination of former Federal Reserve Chair Janet Yellen for Treasury Secretary and expectations that corporate tax hikes are now off the table also reinvigorated sentiment.
Global equity markets had a blockbuster month in November. Risk appetite resurfaced as the latest vaccine headlines spurred hopes for a swift return to normalcy in 2021 and allowed investors to look through some near-term uncertainties at hand. In turn, a profound rotation took hold, with global value stocks outperforming their growth-oriented counterparts by the largest margin since 2001, with energy, materials, and financial sectors leading the performance charge. Regionally speaking, both the S&P 500 and Nasdaq breached new records, while the S&P/TSX erased its 2020 losses. Looking abroad, European and Japanese stocks were the biggest winners thanks to their disproportionate exposure to cyclical stocks, while the emerging market benchmark posted its best month since March 2016.
Fixed income markets also posted modest gains, even despite the ebullient mood in the marketplace. Instead, bond investors took their cue from developments on the political front, with the projected election outcome implying a divided U.S. government scenario. As a result, investors unwound their “blue wave” trades and were forced to reconsider expectations for a large “shock-and-awe” fiscal stimulus package under a Democratic-controlled government. The yield curve bull-flattened in response, with long-term treasury yields edging lower as investors threw in the towel on massive stimulus bets for 2021. Expectations for lighter fiscal spending also ramped-up pressure on the central bank to step-in and fill that gap with further monetary policy support, which put some pressure on the short-end of the curve. Meanwhile, credit spreads barely budged following reports that some emergency lending facilities would expire at year-end and corporate bonds outperformed their government peers during the month.
The U.S. dollar resumed its downtrend as the favorable cyclical outlook and the revival in risk appetite dampened demand for the greenback. In contrast, the Canadian dollar touched a two-year high alongside the sharp rally in crude prices. The euro briefly breached the $1.20-mark, while the pound was well-bid as investors braced for an imminent trade deal between the EU and the UK.
Oil prices regained some notable ground and surged 27% amid the revitalized outlook for global demand, while softer dollar conditions also buoyed prices. Copper powered to a seven-year high as robust U.S. and Chinese economic data bolstered demand prospects for the top two consumers of the industrial metal. Finally, gold posted its fourth straight monthly loss as growing hopes that the end of the pandemic is in sight curbed demand for the safe haven metal.