Following a period of nervousness ahead of the presidential election, investors jumped back into stocks with both feet. Initially as the voting results were being tallied, it became clear that a divided government would be far less likely to implement any major tax changes. Investors subsequently received promising news from multiple healthcare firms working on a coronavirus vaccine. The market largely shrugged off rising bond yields as well as a sharp spike in new coronavirus cases, as the S&P 500 touched all-time highs. Importantly, market breadth widened out beyond the familiar Big Tech stocks to include both value and small cap stocks (chart above), which in our view is a very healthy development.
In recent history, markets have generally done well following elections regardless of who wins. As such, we were able to reposition portfolios during the pre-election market downturn by adding to stocks at more attractive valuations. Currently, about two-thirds of the S&P 500 has a dividend yield above the 10-year treasury, making stocks an essential component for diversified investors seeking returns that offer the prospect of outpacing inflation.
Furthermore, we have slowly rotated into value-oriented stocks that we expect to fare well as daily life slowly returns to a new normal, given their valuation discount to growth stocks and potential for faster earnings growth in the short term. We recognize the potential for higher inflation down the road but believe that the Fed’s new policy framework will limit the damage to the budding economic recovery. Hence, we are finding attractive fixed income opportunities in corporate bonds where credit spreads should cushion the impact of rising rates and outperform treasuries as employment numbers improve.
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