After the waterfall declines in March and the subsequent snapback recovery in April, global equity markets have shown remarkable technical strength through the latter half of 2020, with key moving average levels providing support and optimistic investors buying any dips that have presented themselves. While we expect that the easy gains have already been achieved and plenty of good news is already priced into stocks, the current broad market rally has our Momentum and Sentiment Dial firmly in a “Positive” position.
The marketplace can be difficult to navigate. Anyone who has lived through the tech wreck in 2001 or the 2008 financial crisis knows that the ride can be bumpy along the way.
We developed a principled investment philosophy that guides our decisions to mitigate the risk of losses in the short-term, while producing competitive returns over the long-term. We identified three primary indicators: Momentum, Economic Fundamentals and Market Valuation. These indicators work in tandem to provide a heartbeat for the market.
Our investment philosophy is known as the Three Dials.
While unemployment continues to be an issue both at home and abroad, jobs continue to return to the global economy. After peaking around 25 million in May, continuing claims for unemployment insurance in the US are now back below the 2009 peak of six million. Manufacturing output and new home construction continue to creep back towards pre-pandemic levels. On the whole, leading economic indicators are strong enough such that our Fundamental Dial shows a “Positive” reading heading into 2021.
Given that stock prices tend to anticipate earnings growth, we expect to see above-average equity valuations in these early stages of a recovery. That said, the post-COVID market advance in the face of declining earnings only adds fuel to already stretched valuations. In December, several valuation metrics on the S&P, including Market Cap to GDP and EV/EBITDA, were at all-time highs. As a result, our Valuation Dial remains in a “Negative” position.
On balance, despite unprecedented volatility over the course of the year, our Three Dials composite reading is unchanged from the start of 2020. We take a “Cautiously Optimistic” view into 2021, as strong showings in the areas of Momentum and Economic Fundamentals are balanced by Valuation concerns.