A November to Remember

The month of November has sure been kind to the stock market. Coming into the month we were beset with a multitude of unanswered questions that weighed on market sentiment. Now, nearly all the uncertainty has been removed. While the weight of the virus still hangs like an anchor around our necks, the prospects for a widely available vaccine in the near future lifts the market’s spirits.

For the month, the tech-heavy Nasdaq 100 is up over 8%, the large cap S&P 500 is up over 9%, and the small cap Russell 2000 index is up a whopping 15.6%. Apart from the across the board rally in equities, the most notable event in the market has been the fact that the small cap indices are outperforming the large cap tech index by a substantial margin. All year the market has been led by the performance of technology companies that have benefited from the dramatic shifts in commerce that we’ve experienced since the shutdowns began in early March. From March to October the Nasdaq 100 gained over 72%, while the small cap Russell 2000 only managed to gain 5.3%, putting this month’s modest 7.5% outperformance margin by the Russell 2000 in better context.

Similar retracements have been witnessed recently when comparing the performance of large cap growth indices vs large cap value indices. Since the beginning of September value has outperformed growth by roughly 8.5%. Much remains to be seen if this reversal marks a dramatic shift in market leadership, but if the market hopes to continue to push higher it will need strong participations from small caps and value stocks. With p/e multiples of trillion dollar companies trading at levels typically associated with up and coming growth companies, absent broader market participation, it would be reasonable to expect a pull back in the future.

This brings us back to the beginning of this piece, another potential issue moving forward is the lack of expected positive news in the future. While it may seem counterintuitive, but with no more unanswered questions regarding vaccine efficacy (except what will most likely be a rubber stamped FDA approval) or election worries the market may be left having to face itself in the mirror without the prospects for future good news. That image is of a market that is richly valued, with high multiples the outcome of extreme Federal Reserve action and incredibly low interest rates. Typically, when the market gets what it wants it starts to look for other potential worries. I imagine those worries will begin to surface around the lack of fiscal stimulus given the prospects for a divided congress.

Thanks for reading,

Zach and Dave  

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