Good Things Come in Small Packages


Summary:

  • Market breadth suggests this equity market rally could go on for at least two more years;
  • Mid- and Small-caps have started to outperform large-caps, and should benefit more from continued economic recovery in 2021;
  • Commodities are at generational lows, and represent excellent diversification from standard asset allocation in shares, bonds and real estate;
  • If you (like me) favour gold as a portfolio diversifier, you should perhaps like Silver and Platinum even more.


COVID progression v pent-up consumer demand

The 24-hour news channels are full of the ongoing grim reality of the spread of COVID across Europe, and the increasingly stringent lockdown measures put back into place to curb the growth in the infection rate.

However, this may mask the fact that:

(a) infection rates are actually now falling from peak in most European countries, including Spain, France, and the UK; and

(b) that promising vaccines in phase III trials from Pfizer/BioNTech and Moderna have shown surprisingly high deadline efficacy rates, and are likely to be rushed through the necessary approvals and into production in the very near future.

All the while, however, household savings rates have shot up due to the inability to spend on many services, including of course holidays. In the UK, the latest household savings ratio has now touched 30%, a massive level by historic standards (average is more like 10%)..

UK household ratio hits a record high of 30%

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Source: ONS

This strongly suggests to me that, once current lockdown measures are eased all across Europe, which I would expect to happen some time before Christmas to avoid civil unrest, that we could see a huge wave of pent-up consumer demand being unleashed into 2021.

Economists are understandably having trouble estimating how big a boost this extra consumption could mean to the economy, but I think that it could have a surprisingly large effect in early 2021.

Of course, some of this has already been factored into the share prices of sectors and stocks in cyclical consumer services in the last week or so following the Pfizer and Moderna announcements. But this rotation back into cyclical consumer names may still have quite some way to go, if my theory about the release of pent-0up consumer demand proves correct.

Market Breadth as…

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