by Ralph Cole, CFA
Director, Equity Strategy and Portfolio Management
The stock market is a discounting mechanism. What does that mean? It means the value today is explained by the economy in the future and ultimately long-term earnings. We don’t buy individual stocks with a three-month time horizon in mind, we buy them with a three-to-five-year horizon in mind, and hopefully longer. This helps explain why stocks are up so much this year, and why they remain at elevated levels, despite the recent wave of COVID-19 cases.
Since the end of October, the market has been signaling that 2021 and beyond will be much better economically than 2020. With the election mostly behind us, and a few different vaccines showing major progress, the market is anticipating a robust recovery in future years. Below is a chart of performance of different sectors in the S&P since the end of October.
The only cyclical sector that is lagging is consumer discretionary. That is because Amazon is up “only” 2.7 percent this month. As my colleague Peter Jones, CFA, mentioned last week, the stay-at-home trade is starting to fade.
The market is also starting to discount better earnings in those sectors as well. Cyclical sectors are expected to have their earnings grow a whopping 65.6 percent in 2021.
Fiscal Stimulus Is Needed
This is all against a backdrop of local economies shutting down due to recent surges in COVID-19 cases. What we have seen in the past nine months is that containment measures hurt small business much more than large companies. We believe a fiscal stimulus package will be passed in the next few months. This is likely to be a smaller package with benefits directed at those most harmed financially by the shutdown.
Takeaways for the Week:
The cyclical trade remains intact, despite the recent rise in COVID-19 cases
Support your local small businesses this Holiday season because they are most harmed by COVID-19 mitigation efforts