Market Musings 05/12/20: After such a strong November for stocks, what is next?

5th Dec '20 by Edmund Shing

5 comments 2332 reads

After such a strong month of November for stocks, what is next?

The facts: At a 12.8% gain, November 2020 saw the biggest rise for the MSCI World index (in USD) since 1980.

The context: against the backdrop of a sustained recovery in stock markets from the coronavirus-inspired bear market, the news of 3 coronavirus vaccines posting high efficacy rates in Phase III trials, plus the expected start of mass vaccination in Europe and the US before the end of this year, has fuelled a surge of optimism in financial markets.

Economic growth forecasts remain high (global GDP growth of over 5% expected for 2021 according to consensus forecasts), resulting from a sharp expected recovery in investment and consumer spending post lockdowns.

The concern: after such an amazing rise in value for investors’ portfolios in November, and indeed after a rise of 44% in the MSCI World index in USD to date since end-March 2020 (31% in euros), should investors sell equity exposure to take profits?

A historical guide: After a monthly gain of 8% of more (19 occasions over 1980-2020), the MSCI World index has gained an additional 6.5% on average over the following 3 months, and 12.6% on average over the following 6 months, rising 15 out of 19 times over these subsequent time periods.

Where has been strongest: The countries/regions that have historically posted the best subsequent 3- and 6-month performance following such strong single months include MSCI Emerging Markets, the French CAC-40 and the UK FTSE.

Conclusion: As we expect continued volatility in stocks over the year-end holiday period, I would be selective in my cyclical stock exposure (preferring the Mining, Construction and Industrial sectors over Travel & Leisure and Banks). History suggests that investors reducing equity exposure now may miss out on further gains over the next six to twelve months.

UK FTSE index: post 8%+ months, 6.4% average rise over following 3m

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MSCI World: post 8%+ months, 12.6% average rise over following 6m

Best,

Edmund

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gari en desti

5th Dec '20

thanks. that's very interesting.

William K

6th Dec '20

Many thanks Edmund. Yes, apart from the weak US Nonfarm Payroll data on Friday, I strongly agree that everything looks pretty good, especially in the Emerging Markets. Copper has gone up by around 10% over the last 3 weeks, which endorses the markets' optimism. Iron ore has gone up by 25% over the last month, another good indicator of future growth. Rio Tinto (LON:RIO) has gone up 30% since the start of November (etc, etc). Unless we get any tiresome black swans, the emerging market funds, such as $EMRD which you mention, should go up by 20% at least over the next 12 months.

Ridwan

8th Dec '20

Thanks for sharing your thoughts. I’m hoping for a good 2021.

Martin VT

9th Dec '20

Thanks - very interesting and relevant data.

I always expected this winter to be volatile. Brexit, Covid, large scale unemployment, companies going into administration, these all may add to the general gloom of winter. That said, I expect by March/April, Covid will be rapidly reducing as a threat, our knowledge and understanding will be improved, Brexit will be something that we begin to stop talking about, economies show signs of rapid growth and spring will be here. So although it may be a bumpy ride, I am staying fully invested, as this November shows one cannot predict when the mood will change, and I think that over the next few months there will be good returns to be made.

Momoko Miyamoto

OR,

We crash out with a no deal Brexit, there’s mayhem at the ports and supermarket shelves are stripped bare, retailers cannot restock their inventory and there’s a run on the pound, which sends inflation rocketing upwards.

The vaccine rollout is yet another fiasco and doesn’t turn out to reduce transmission nor be particularly effective in the elderly or vulnerable (on whom it has not been tested) . Social distancing and partial lockdowns go on and on.

None of this may affect the market momentum of course as the diarrhoeal monetary policy continues.

Market Musings 05/12/20: After such a strong November for stocks, what is next?

After such a strong month of November for stocks, what is next?

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Edmund Shing

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