FINANCIAL MARKET UPDATE 11.17.2020

STORY OF THE WEEK

RISK AND RETURN

When we advise clients about their investments, we always look at it through a lens of weighing risk & return. Take more risk, and one should expect higher rates of return. We believe that these two factors will always be related. There are no free lunches of high return and no risk. Financial markets in this day-and-age are too efficient for that. How much risk a client needs depends on many factors like time horizon, risk tolerance, balance sheet, liquidity needs, and asset location. However, we are seeing a dilemma now playing out in the world, causing many investors anxiety, which could lead them to go against their own best interests.

Most have probably heard the term “don’t fight the Fed.” However, in this case, we are seeing it play out in an instance of “don’t fight the Fed and the Federal Government.” Looking at the graph below from the Federal Reserve, we can see that injections of liquidity via the PPP, individual checks to consumers, and monetary stimulus from the Fed have caused total savings deposits at institutions to rise by almost $2 trillion since the start of the year.

The next graph below shows the increase in money market mutual fund holdings.  You can see those have risen more than $1 trillion since the beginning of the year.

The problem for investors with the increase in cash/savings balances is that the yields on these types of accounts are close to zero. This causes the anxiety of wanting to “get more return” on those funds, which in turn causes them to potentially act against their own interests by taking excess risks on funds. We have seen this play out this year with the increase of “day trading” and speculation in the stock market, cryptocurrency market and general risk assets.  Even “riskier” bonds have seen an influx of funds as high yield bond yields are at all-time lows due to demand.

By no means does this imply that investors should not be taking risk! As noted earlier, risk and return are related.  However, we caution investors seeking out excess return on funds that are supposed to remain safe and liquid for their own balance sheets.  Like Warren Buffett said, “The stock market is a device for transferring money from the impatient to the patient.”

WEEK IN REVIEW

• Markets opened the week following positive Covid-19 vaccine news for the second time in a row. This time the positive news came from Moderna, which announced its vaccine was 94.5% effective based on the initial evidence of its large-scale trial. U.S. stocks pushed to all-time highs on the news, with the S&P 500 gaining 1.2%. Similar to last week, small-caps and value outgained large-caps and growth following the announcement.
• 92% of S&P 500 companies have reported results for the third quarter, with 84% and 78% of these firms beating on earnings and revenues, respectively. The earnings growth rate of companies that have reported, blended with the forecast of companies that have not yet reported, improved to -7.1% from -7.5% last week. The initial estimates as of the end of the quarter were -21.2%. A handful of large retailers will be announcing earnings this week, including Walmart, Home Depot, and Lowes.
• Economic data to watch for this week includes retail sales and industrial production today, and jobless claims and the Index of Leading Economic Indicators on Friday.

HOT READS

Markets

• We Can Stop COVID-19: Moderna Vaccine Success Gives World More Hope (Reuters)
• Moore’s Law Is Ending. Here’s What that Means for Investors and the Economy (Barron’s)
• U.S. ETF Market Tops $5 Trillion in Assets as Investors Stampede Into Stocks on Vaccine Hopes (CNBC)

Investing

• Why 2020 Was the Perfect Year for Tax-Loss Harvesting (WSJ)
• The Post-Pandemic Trade (Ben Carlson)
• There Is No Vaccine Against These Investing Mistakes (WSJ)

Other

• Alzheimer’s Research Looks at Hot Spots Across the U.S. (WSJ)
• Batteries of the Future Are Weightless and invisible (Wired)

LFS BLOG

• Why High Net-Worth Families Should Review Their Estate Plans Pre-Election
• Is Value Investing Dead?
• Why Investors Should Own International Stocks
• 3 Things All Investors Should Know

ECONOMIC CALENDAR

Source: MarketWatch