U.S. Markets Pull Back From Record Gains

Consumer sentiment and personal income fell last month

Yesterday's record-breaking enthusiasm didn't last long for the Dow Industrials as the index pulled back to end a shortened trading week. Tech stocks pulled higher as the see-saw between the recovery rally and the stay-at-home trade continues. U.S. markets are closed tomorrow for Thanksgiving and open for half the day on Friday.

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A bevy of economic reports showed that the U.S. recovery has stalled a bit and we are starting to see it in consumer sentiment, personal savings, and personal income. U.S. weekly jobless claims came in higher than expected, a sign that employers are letting go of workers as the second wave of the virus sets in. On the flip side, the U.S. housing market remains strong as low interest rates are spurring on buyers and record refinancing activity. 

2020 has been a year of extremes. We list a few down below, but you can find them all over the economy and capital markets. 

Equity Risk Premium Still Favors Stocks

With U.S. indexes at or near record highs, investors are naturally asking themselves if they've come too far, too fast. The answer is probably yes and yes, but that's all relative. With interest rates at or near zero, paltry bond yields, and money market rates below 1%, where else can an investor find upside besides Bitcoin?  

Another way of looking at it is through the prism of the equity risk premium — the return that investing in the stock market provides over a risk-free rate like government bonds.  

Even though markets have rallied, the current equity risk premium is not terribly high relative to other tempestuous market cycles in recent history, according to BofA Research. 

If investors don't feel the stock market is terribly risky at these levels, and returns are hard to find elsewhere, there is a good argument to be made that markets will head higher, absent a new shock.

Time is on Your Side

Mick Jagger sang it best, but the chart above is one of the most important lessons for young investors. Consistently investing beginning at an early age greatly reduces your chances of losing money. Of course, you'll have winning days and months, and losing days and months, but the longer your time horizon, the better your chances of gains. 

If you continually invest every month, your gains will compound over time and that's where the magic of investing really works. Sallie Krawcheck, my guest this week on the Investopedia Express podcast, reminded me of one of the only real truisms in investing: "Time in the market is always better than timing the market."

2020 By the Numbers:

With a little over a month to go in this very unique year, here are just a few numbers that tell part of the tale of extremes in both the U.S. economy and the stock market.

  • 12 million: That’s the number of jobs that have been added back since May compared to the 22 million people who were laid off amid the pandemic.
  • 13 million: That’s the number of Americans receiving expanded unemployment benefits as part of the CARES Act. Those benefits expire on Dec. 31 unless Congress votes to extend them.
  • 3.6 million: That’s the number of long-term unemployed Americans who have been out of work for six months or more. That number keeps growing every month, which shows how hard it will be to bring the labor economy back to full steam. It’s especially bad for women, and particularly women of color. 
  • 12.3%: That’s the return on the S&P 500 year-to-date. That’s after the 34% crash in March, the 40% recovery through the summer, and the 5% or 6% that’s been added since then.
  • 82%: That’s the percentage of stocks listed on the New York Stock Exchange trading above their 200-day moving average — that’s the highest its been since 2013. What happened after that? The stock market rallied another 45% to its peak in 2015. 
  • $4.5 trillion: That’s the amount of money sitting in U.S. Money Market funds as of the end of the third quarter. That’s down from a record high of $4.8 trillion in June, but still shows just how much money is sitting on the sidelines earning less than 0.7%, waiting to be invested.

Here's a wacky world of returns so far in 2020:

Share price chart
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