A blistering November ended meekly as all major U.S. indexes traded lower, closing out a month for the history books. The DJIA topped 30,000 for the first time, and the S&P 500 and the Nasdaq both hit multiple record highs. Bitcoin soared, then stumbled, then soared again as major financial institutions and big investors pushed the cryptocurrency to multi-year highs. The U.S. dollar and gold both faded this month, while emerging markets soared as investors bet on the global recovery.
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It was the best monthly performance for the DJIA since 1987 (ignore what happened on Black Monday 1987, if you can), and the Nasdaq and S&P500 posted their best month since April. Positive vaccine news, which continued today with Moderna's announcement, fueled the rally, as did the waning anxiety over the outcome of the U.S. elections. Wall Street is winning, but Main Street has some serious potholes.
Inside the U.S. markets, the rotation from growth to value was in full bloom as cyclical stocks like energy, financials, and transports all rallied, while Big Tech and stay-at-home stocks lost some of their froth. That rotation was never more evident than today, the final trading day of the month. According to Topdown Charts, today saw the biggest shift in price performance from growth to value in history.
Betting on Upside
Not only have equity markets experienced record inflows amid the vaccine rally, but options traders are also optimistic about the strength of the rally. That doesn't mean the market is going to go up every day, but the optimism is intact. We can see it in the CBOE equity put/call ratio, which measures the amount of bearish bets on the future direction of the equities market against the bullish ones. It's at its lowest level since June, which was the lowest level since 2000.
To be sure, the put/call ratio is often viewed as a contrarian indicator. An extremely low ratio means the market is extremely bullish. A contrarian might conclude that the market is too bullish and is due for a pullback. Eventually, they'll be right.
Moving Averages Confirm Sentiment
It's not just the options market that is ringing of optimism. A full 92% of S&P 500 stocks are now trading above their 200-day moving averages. That's the highest level since 2013, and many market technicians believe that 2013 was the start of a pretty strong cyclical bull market that ended at the beginning of 2017.
Wall Street Wins, While Main Street Loses
There are various reasons why the stock market has rallied way beyond what seems reasonable given some underlying economic conditions — particularly in the labor market. Low interest rates, low yields on bonds and money market funds, hopes for a recovery, the Federal Reserve propping up capital markets through monetary policy, etc. You know them well. But the value of the stock market has well-exceeded historical norms as compared to the value of the overall economy.
The War on Inequality
As BofA Research notes, "Never in the field of monetary policy was so much gained by so few at the expense of so many." The value of financial assets (Wall Street) relative to the value of the economy (Main Street) is now greater than 6x. This is amplifying the war on inequality and it's likely to intensify in the coming years. The only way to stop it is higher inflation and higher interest rates, which in turn means either lower asset prices (stocks) or a higher share of the economic spoils for Main Street via more taxation.
All of the above are not likely anytime soon, although many would argue that the waves of inflation are already mounting on the horizon. But we can expect the war on inequality to become a louder refrain in the Biden administration, especially now that we know who will be on his economic team.