November was a great month for the markets. In fact, it was one of the best on record. U.S. markets were up by double digits, as were most markets around the world. We saw new all-time highs here, and even fixed income had a good month. From an investor’s point of view, things looked not just good but great—and clearly markets expect even better times ahead. But do they have it right? Let’s take a closer look.
Gloomy medical news. For most of the month, the third wave of the pandemic got steadily worse. New case counts peaked at over 200,000 per day, the positive testing rate spiked to over 10 percent, and health care systems continued to creak under the strain in many states. The medical news, for most of the month, just kept getting worse.
Economic slowdown. The medical news was getting so bad, in fact, that it finally started to affect the economy. Layoffs ticked up throughout the month, and consumer confidence dropped. Spending, while still growing, slowed substantially. Plus, there were signs that, as resilient as the economy had been so far, shutdowns and consumer fear were finally going to slow growth again. Moving through the month, there were real signs that we could be entering another slowdown like we saw in the first wave. But, somehow, markets kept rising. Why the disconnect?
Forward-looking markets. The disconnect comes from the fact that as bad as the medical and economic data has been, that is backward looking. Markets, looking forward, are taking into account a number of positive trends that should help as we move into December.
Third wave cresting. First, there are signs that the third wave may be cresting. Infection growth, while still far too high, grew more slowly at month-end in response to both more restrictive public policy and changes in public behavior, which is what we saw at the crests of the previous two waves. There is a good chance we may be seeing the end of the third wave now. This outcome is not guaranteed, and there is a significant risk of renewed infection growth from Thanksgiving travel. But slower growth does show that behavioral and policy changes are starting to work. Even if we do get another surge from holiday travel, we are likely near the end of the third wave, which would be positive.
Vaccines coming soon. Second, we have vaccines on the way. There are now two safe and effective vaccines that could be available this month. This development will help public confidence and start to mitigate the medical risks. In fact, if the vaccines do launch in December, it will be the beginning of the end of the pandemic. With infections very possibly declining anyway and vaccinations starting, December may well see the medical news turn from the worst to something approaching the best.
Economy still growing. Third, with the improvement in the medical news, the economic news is also likely to improve, although possibly with a lag. Consumer confidence could recover as the pandemic peaks, and holiday spending is likely to be the beneficiary. The economy is still growing and starting to take away this headwind could help a rebound in December.
This is what markets are seeing: not the bad news behind us in the mirror, but the much better news that is likely ahead. With companies adapting to the new economy (third-quarter earnings came in much better than expected), a more normal economy could drive more gains.
A historically good month. None of this is guaranteed, of course, but December is likely in most respects to look better than November. The medical news should be better. The economic news should be better. And while markets may not do better, as November was one of the best months ever, we still have room for more gains. December is historically a good month—the Santa Claus rally is proverbial—and this year looks likely to follow tradition.
November was a bad month for the news, but it was a good month for the markets. December looks likely to be a better month for the news, which should lead to another good month for the markets.