Markets Continue to Advance

By Bruce DeLaurentis - December 2020

A widespread uptick in COVID-19 cases in the U.S. and elsewhere is triggering more severe lockdowns as the year-end holiday season approaches. Ordinarily, one would expect markets to be under pressure in response to suppressed economic activity but that is certainly not the case now. Investors instead appear to be focused on a return to “normalcy” once vaccines are made available.

Such enthusiasm may be getting ahead of itself, though, at least in the short term. From a fundamental perspective, widespread access to vaccines is not likely to occur before the middle of next year. Even so, investor sentiment readings are reaching extremes as the major stock indices surge into new all-time high ground.  One example is the record amount of call option buying (leveraged bets on higher stock prices) which indicates investor sentiment is approaching a bullish extreme.  Consequently, caution is warranted as a short-term pullback may be in the offing.

Regardless, the outlook for markets over the mid- to longer-term remains constructive. Although the transition to a new administration has not been finalized, investor anxiety stemming from political uncertainty has certainly abated. And despite Congressional gridlock and posturing, another round of stimulus relief appears likely as lockdowns threaten to dramatically slow economic activity once again.

The recent stellar performance by high-yield bonds further supports our positive outlook. The Fed has made it clear it will backstop any widespread weakness in these bonds, although Fed policy could change with a new incoming chairperson. The much higher rate these bonds pay versus more conservative alternatives remains appealing, despite the recent slight uptick in interest rates.

At times like these, it is important to keep in mind that markets are a two-way street. Investors are getting rewarded now by stepping up their risk exposure, but there will come a time when prices will reverse. Only a few short months ago, markets were getting pummeled. Now that prices have more than recovered, there are multiple signs caution is being thrown to the wind.

Kensington’s philosophy is to be always on guard for the unexpected, especially in an environment like today. When markets do decline, Kensington’s focus will remain the same as it always has—seeking to preserve investor capital during times of market volatility.

 

Best regards,

Bruce P. DeLaurentis

Kensington Analytics LLC

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FROM THE DESK OF KENSINGTON'S PORTFOLIO MANAGEMENT TEAM