Still Plenty To Give Thanks For

 One of my favourite holidays from when we resided in New York was Thanksgiving (we call it U.S. Thanksgiving because we still celebrate both the Canadian and U.S. holidays), there was always such a good feeling that surrounded it, the air was crisp and cool and there seemed to be a spirit of goodwill in the air: it started with the evening before which usually involved a skate at Wolman rink in central park:

And the blowing up of the floats that begin later in the evening in preparation for the Macy's parade and took most of the night on W81st street where we were the guests of the Excelsior Hotel for the night (our home at the time was on the north shore of Long Island, Baxter House, Port Washington). A few seconds walk to my aunt, uncle and cousins' place at the corner of W81st and Central Park West, across from the Museum of Natural History, where there was always a Thanksgiving Eve party or get together that followed our Wolman skate.

We (my daughters were 4, 6 and 8 for our first parade in 1993) were early to rise in the morning and the excitement was palpable as we wandered, pre-parade, about the newly inflated characters (usually, as I recall, Spiderman and Clifford, the Big Red Dog, among others) just outside the hotel door. The kids were in awe, which added to the spirit of it all. Fantastic memories:

We won't be in NYC this year, as we were last year. As with a lot of our annual traditions, this one has been put on hold (who knows what lies in store for us at Christmas time), however, apparently, the parade will go on for TV viewers, but in a different format (but still in NYC) thanks to Covid-19. Out of nostalgia, I will be tuning in.

Despite all the upheaval brought on by the coronavirus pandemic, there is plenty to give thanks for: what looked like an economic and stock market meltdown back in March has turned itself around considerably thanks to government and central bank policy stimulus, followed by what may possibly be some political directional change and vaccines that, at the moment, look to have a pretty high level of efficacy.

Yesterday, a pair of our younger clients put an offer in on their first home and needed some cash, so we were busy locking in what looks like a fine return (after fees) year to date, in a pretty balanced mandate (a little more aggressive for them, given their time horizon of 40 or so years to retirement). Nonetheless, back in March, I don't think many of us would have seen that happening.

This pandemic is far from over and it is possible and even more likely that the realities of job losses for many are going to catch up with the economy before the vaccines are able to allow for a better future, but there is certainly some encouragement for that future.

Stocks hit record highs on the back of this encouragement (and I love selling into record highs and taking profits), but as I mentioned last week, valuations are stretched and the "fear and greed" index is suggesting that we are looking at "extreme" greed at the moment. Usually this is followed by some effort by stock markets to correct and buying opportunities will abound when that happens. 

So we can be thankful, but we should not be complacent. 

As well, remember that past performance is not a guarantee of future returns and while, at High Rock, we work darn hard to get the best possible risk-adjusted returns for our clients, many clients may have different goals, objectives, risk tolerance and time horizon's and all of this goes into the building of a tailored and personalized investment strategy.

"The Future's So Bright, I Gotta Wear Shades"

(with apologies to Timbuk 3 and their 1986, one hit wonder, single !) 

Anybody remember what happened in 1987?

Here is what Investopedia has to say about the October 17, "Black Monday" stock market crash: "The stock market and economy were diverging for the first time in the bull market, and as a result, valuations climbed to excessive levels..."

Stock markets have rejoiced at the recent results of the Pfizer and Moderna vaccine trials and yet again stock market participants have taken their bullish outlook to new extremes: new highs and wildly stretched valuations. Don't get me wrong, I love seeing client portfolios rising in value and I am certain that clients love to see it too, however we know what happens when the majority are bullish and have all bought in (all the good news is priced into the market). New buyers start to be few and far between because most of the money chasing prices higher has been spent: those portfolios become vulnerable to a correction as profit-taking enters the market. Just be prepared (emotionally) for the days when portfolio values start to slide lower.

As our friend and critical thinking strategist David Rosenberg suggested in his morning comment today:

"The new mantra is that November is proving to be the best month the stock market has seen since October 1987! Just a warning because the last time we heard the cheerleaders saying this was back in January of 2018... You would never have guessed that from the end of January 2018 to the end of that year, the S&P 500 was down 11% (and tax cuts were the "game changer" like vaccine treatments are today)."

"My advice is to expect the unexpected"... (where have we heard that line before? See my December 29, 2019 blog)"... and fade the consensus at all times when it becomes a herd mentality in either direction".

My friends, while the vaccines may begin being distributed in the next few months, Covid cases are escalating and the political deadlock to our south is bordering on dangerous.

Clearly there is a good reason to be optimistic on the potential for economic growth for the long-term, but we think that it is prudent to temper short-term expectations:

I study nuclear science
I love my classes
I got a crazy teacher, he wears dark glasses
Things are going great, and they're only getting better
I'm doing all right, getting good grades
The future's so bright, I gotta wear shades

 While We Were  Focusing On This...

This was happening: (record daily increases in Covid -19 cases)

and...

As well, we got a look at important Q4 data on the employment / unemployment front:

In the U.S., the Labor Department reported (yesterday) that employers added 638,000 jobs in October and the unemployment rate improved to 6.9%. However, there remains over 10 million jobs lost from pre-pandemic levels:

In Canada, Statistics Canada reported (yesterday) that there were 83,600 new jobs added in October and the unemployment rate fell to 8.9%. There were 635,000 fewer jobs than pre-pandemic levels:

Clearly, employment gains are slowing.

And behind the headlines, in Canada, long-term unemployment (looking for work for over 27 weeks) is accelerating:

Statistics Canada reported that it "increased by 79,000 (+36.2%) in September and a further 151,000 (+50.7%) in October... As of October, the long-term unemployed totaled 448,000, or one-quarter (24.6%) of all unemployed people."

"September and October increases in long-term unemployment are by far the sharpest recorded since comparable data became available in 1976".

With increasing Covid-19 cases and the potential for further lockdown and / or simply seeing consumers staying away from and /or postponing economic activity and employment growth stalling, the longer-term outlook becomes more uncertain.

If, as and when the de-coupled stock markets start to wake up to an economy that has a significantly longer time frame for recovery (and the likely not-so-positive impact on corporate earnings) and add in a U.S. political situation that may be more complex with a likely Democratic President and a Republican Senate (uncertain fiscal stimulus), then I would suspect that would leave stock prices vulnerable to the downside. 

Based on this, with current stock price valuations at expensive levels, the risk to the downside for stock prices is once again heightened. Patience will be required. Volatility will bring opportunity and we believe that more volatility is coming.