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Dichotomy Between Economy and Market Persists

We hope everyone had a happy and healthy Thanksgiving. No doubt for many it was much different than in previous years, but that is commonplace for virtually everything since the onset of the pandemic. Over the weekend, you likely saw video of hundreds of cars lined up at food banks across the country while the stock market was hitting all-time highs. The dichotomy between the economy and the market persists.

Indeed, November was the best month for the Dow Jones Industrial Average since January 1987, continuing the stock market’s incredibly strong rebound from the sharp sell-off in March. The Wall Street Journal reported that 464 stocks in the S&P 500 are up for November. In October, by contrast, 212 stocks in the benchmark index gained ground. In September, only 153 did so. The wider range of stocks shows broadening support beyond the few highflying companies that propelled stock indices earlier this year.

For investors, there is much for which to be thankful.

  • Amazing human ingenuity along with Operation Warp Speed has produced three vaccines which have tested over 90% effective with few side effects. Previously, no vaccine was developed in less than 4 years. Widespread vaccination will be key to reopening all parts of our economy.

  • The Fed and Treasury acted immediately and decisively providing liquidity for capital markets and banks, and support for the unemployed and businesses. At the depths of the recession, even the most optimistic economist did not expect us to get below a 10% unemployment rate this year. We are currently below 7%. While too many people are still without work (particularly in the service industries), this has been a remarkable rebound.

  • S&P earnings have significantly exceeded expectations in both the 2nd and 3rd quarters and estimates have increased substantially for the 4th quarter. 2021 earnings are now expected to be more than 21% above the 2020 level.

  • Mortgage rates are at 50-year lows. This has led to a very strong housing market and a corresponding increase in consumers’ net worth.

  • Business formation is skyrocketing. Small businesses are the engine of job growth.

  • The largest cash flow into global equities, ever, occurred over the past two weeks. Despite that, cash levels are still elevated.

There is plenty to be thankful for from a market perspective; the question now is, how much good news is priced in? Most stocks are not cheap. Having a long-term plan, sticking with your asset allocation, owning quality companies, and not overpaying for them are the hallmarks of prudent investing.

The LVM Team

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