U.S. equity markets bounced out of early losses to notch slight gains for the DJIA and the S&P 500, which topped a new closing high. Energy stocks led the gains as oil prices ticked higher on good vaccine news and continuing talks among OPEC members about maintaining production cuts.
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The shift into consumer discretionary stocks has gone into high gear as investors are leaning in harder on the recovery trade. A lot of professional money managers were late to that and now they have some catching up to do (more below). They may have a chance given what usually happens after market gains of 10% or more in a month, like we saw in November.
According to LPL Financial, a 10% monthly gain has been followed by additional gains the next month more than 50% of the time, and gains over the following three months about 75% of the time. And historically December has been the second best month of the year, behind November — except for that 10.8% drop in Dec. 2018. History is full of outliers.
What We Want vs. What We Need
The rotation into the recovery rally has boosted consumer discretionary stocks as investors bet on a tsunami of spending once vaccines go mainstream. Consumer discretionary stocks include auto, home, and luxury retailers and travel-related industries. Consumer staples stocks, like food and beverage companies, household product producers, and discount retailers, held up very well throughout most of the pandemic, but the rotation from staples to discretionary stocks has become very pronounced.
As JC Parets at AllStarCharts.com points out, the ratio of discretionary stocks as seen through the XLY ETF and consumer staples through the XLP ETF, widened to all-time highs as big investors swapped one for the other. They go the opposite way in a down market. They go the opposite way in a down market.
In a strange way, the consumer discretionary sector acts as an economic indicator of sorts. If consumers are able to buy what they want, and not just what they need, the economy is getting stronger (at least for some people). Since consumer spending is 70% of GDP, this is kind of important.
Mutual Funds Missed the Recovery Rally
Do you remember those October outflows from mutual funds and ETFs we were writing about yesterday? Not only was the timing terrible given November's bounce, but many mutual fund managers were not able to time their re-entry correctly. At least that's the assessment of BofA's research team and its mutual fund manager report card.
According to BofA, only one of three of the large cap active mutual funds outperformed their respective Russell 1000 benchmarks in November. Year-to-date, only 36% of funds beat the benchmark, down from 40% as of October.
What They Were Missing
50% of large cap funds were underweight energy and 20% were underweight financials, the two best performing sectors (+27% and +17%, respectively). You can't blame the funds for being cautious around those two beaten-down sectors, but the harder the stocks fall, the faster they rise when sentiment shifts. It's hard for portfolio managers to pivot quickly given the funds' structures — which may explain some of the outflows in October.
Americans Souring on Economy
Nine months into the pandemic and many Americans are worn out and getting worried about the economy. We were supposed to be further along into the recovery by now, but we didn't do enough to prevent a resurgence of the virus.
Gallup's most recent poll on Americans' outlook for the economy shows an unwelcome increase in the percentage of Americans who say the economy is getting worse. Only 40% believe it’s getting better, still well off April’s lows, but a tick down from the prior month.