As we enter the last stretch of a very eventful year, we try to zoom on a few variables to help us navigate markets that could be more sensitive than usual to the news flow.
* Transition of power. The election resolved itself with a fairly clear result and, so far, markets have operated on the assumption that in spite of the current Administration's attempt to use all means to reverse it, such legal attempts will end up failing. This is certainly the consensus view but the probabilities of an outlier event that derails this path to transition is still higher than usual.
* The state of the economic recovery. Unsurprisingly, given the recent trends in other countries, we are now experiencing a surge in COVID cases and that is leading different States to increase mobility restrictions. Such actions could have repercussions onto GDP numbers for the first quarter of 2021. An increased probability for a relapse into recession is also due to the recent rift between the Fed and the Treasury. The current disagreement is surprising since the two institutions are usually partners in crime. No doubt, the situation is the product of the larger political landscape which is surreal in its own merit.
* The vaccines. On the medical front at least, we have recurrent good news. The Pfizer and the Moderna vaccines seem to have a success rate of over 95% and rumors are positive on the Oxford vaccine as well. At this point, it seems the issue is strictly related to manufacturing and distribution. We stick with our earlier prediction that by mid-2021, the vaccine will be widely distributed and effective.
* The Value-Growth switch. In the week of 11/13, Value outperformed Growth by a whopping 9%. This was a long overdue switch since Value had underperformed for years. Not only such long underperformance did frustrate Value money managers but also academic professors (like our very own CIO) who have been teaching for decades about the Value anomaly and its long-term outperformance over Growth and index investing. Whether the switch will continue without glitches is a function to a large extent about the development of the three previous variables; the sooner the medical situation normalizes and the sooner fiscal policy kicks into gear, the higher the chances that Value will catch that cyclical tailwind. Keep an eye on that yield curve, as any indication of a renewed flattening could kill the switch to Value.
In conclusion, in spite of the fact that we are entering the most bullish period of the year from a seasonal perspective, we expect markets to churn with limited upside and be somewhat vulnerable to a turn for the worse in variables 1 and 2. However, we still think that repositioning among equity managers in different sectors as a function of relative valuations and positive expectations for the second half of next year provide enough opportunities for the long-term investor.