Market Watch: Nov. 27

It was a record-setting day for the Dow on Tuesday, surging past the 30,000 mark for the first time in history, after President Trump said his aides would cooperate with President-elect Joe Biden’s team as they transition to the White House. Optimism also increased after it was reported that Biden plans to select former Fed Chair Janet Yellen as Treasury secretary. In Canada, the TSX closed up 180 points, with the energy sector climbing more than 4 per cent, on top of Monday’s 7 per cent rally.

The Dow retreated Wednesday, however, falling below 30,000 after a slew of mixed economic and virus data. As of Tuesday, more than 88,000 Americans were hospitalized with the virus, a record high for a 15th consecutive day. Also weighing on markets was news that initial jobless claims rose for the second consecutive week, to nearly 780,000, a sign the virus was seriously impacting the labour market recovery.

Additionally, U.S. household income fell 0.7 per cent last month. The fall in incomes and rise in jobless claims has left some investors concerned for the near term, especially without a coronavirus relief package to help struggling Americans. According to food bank data, more than 50 million Americans, nearly 1 in 6, are facing food insecurity.

Although U.S. markets were closed Thursday, the TSX notched its seventh straight winning session, adding 38 points by the day’s close. Finally, the U.S. dollar this week hit its lowest levels in more than two years. According to analysts, pricey U.S. stocks, near-zero interest rates and a recovery of global growth should all weigh on the dollar in 2021.

U.S. Markets Climb Higher; TSX on Winning Streak

For the four trading days covered in this report, the Dow added 609 points to close at 29,872, the S&P 500 rose 72 points to settle at 3,629, while the tech-heavy Nasdaq climbed 239 points to close at 12,094. In Canada, the TSX climbed 234 points to end at 17,351.

Strategy

Pockets of opportunity still exist despite equity markets all-time highs and rock-bottom government bond yields.

Equity markets cheered Joe Biden’s presidential election victory and have continued to grind persistently higher over the month, defying expectations for increased volatility stemming from count delays and concerns over the transfer of power.

Instead, investors focus trained on vaccine developments and the positive announcements from Pfizer and AstraZeneca, though the latter will likely need to run additional trials after current studies raised questions over its level of protection.

Undeterred, the Dow Jones Industrial Average pushed above 30,000 for the first time ever, and the S&P 500 Index surpassed its September peak to mark yet another all-time high.

Government bond yields are likely to remain near their current low levels for the foreseeable future as central bank policy rates are chained at or near zero. Indeed, policymakers the world over have committed to fostering recovery momentum and inflationary pressure through low rates and monetary stimulus, further assuring market participants policy will remain accommodative for as long as necessary.

The question many investors are asking is: “what now?” In our view, there is room to run in equities, though the current rate of ascent suggests a degree of caution is warranted. Fixed income spreads have tightened to near their pre-crisis levels.

While there is little room for further narrowing, we maintain a constructive outlook for corporate credit and the highest ranks of high yield, particularly at the belly of the curve. And despite historically low yields on government bonds, they remain constructive portfolio constituents given their ability to preserve capital in the event of renewed bouts of volatility.

We are encouraged by recent economic data releases. However, the level of upside surprise has tempered of late, and we maintain a cautiously optimistic outlook but note downside risks remain front-and-centre. Accordingly, prudent asset allocation and portfolio diversification should benefit long-term investors while tactically adding to positions should prices pull-back.

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Market Watch: Nov. 27

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