@theMarket: Market Cyclicals Take the Lead

It was a good week for investors, which is not surprising since Thanksgiving week has been kind to investors in the past. The question is, will December fulfill its role as one of the year's best months for stocks?

 

The short answer is yes, I don't see why not. My recent target for the S&P 500 Index is 3,800, but it is possible that I may be too conservative. An additional spike up to the 4,000 level might be in the cards sometime early next year, but one week at a time. What is the bull case for those lofty predictions?

 

I have long argued that a coronavirus vaccine was key to the economy and the market's future performance. We now have at least three vaccines with possibly more in the wings. That is a game changer, in my opinion. While distribution of these medical wonder drugs will take time, markets are discounting their successful distribution now, not when it happens in three to six months.

 

While I expect the present surge of COVID-19 will ravage the nation throughout the winter (as happened in the 1918 influenza pandemic), there is some hope that the government could come to the rescue in ways it has failed to do leading up to the election. Most observers around the world would give the U.S. failing marks in handling the pandemic. What is worse, there has been a notable vacuum in leadership in Washington since the election, even as deaths and cases skyrocket. That void in leadership is increasingly being filled by the president-elect by default.

 

Plans to combat the coronavirus and alleviate its worst impact on Americans, a viable and far-reaching program to distribute the vaccines, and the willingness to spend what it takes to accomplish that mission, have given the country and Wall Street new hope. Rather than Armageddon, which was predicted if Joe Biden and the Democrats won the election, the nation has been impressed by Biden's picks for cabinet positions this week. In addition, Janet Yellen's selection as U.S. Treasury secretary (the first woman to fill that post), has met with approval from the business and financial sectors.

 

It was Biden's election and his subsequent actions which has propelled the stock market to new highs in the past weeks. President-elect Biden's initial moves appear to have reassured Wall Street and many conservatives that his will be a moderate path forward. Until that proves wrong, the financial markets should continue to gain.

 

As I have been pointing out during the last two months, underneath the overall averages there has been a sea change occurring in the market's leadership. Technology, especially the large-cap leaders that have propped the market up in recent years, are relinquishing their leadership role (at least temporarily). In their place, industrial, transportation, materials, financials, and other cyclical parts of the economy have been given a new life, as reflected in their stock prices.

 

Basic materials, led by copper, a key ingredient of any worldwide economic recovery, have soared. Energy stocks, the worst performing sector of the markets by far this year, have seen double digit gains. The price of oil has lifted as traders anticipate additional demand by a world in economic recovery. Two casualties of this switch from tech to value and cyclicals has been the "safe haven" plays of the U.S. dollar and gold.

 

The dollar, as measured by DXY, an index that measures the value of the greenback relative to a basket of foreign currencies, is hovering just above a major support level at 91.75-92. A break below that would likely send the dollar a great deal lower. Gold has also fallen below the $1,800 an ounce level.

 

Normally, a declining dollar would be good for gold, since it is perceived as an alternative form of currency, but not right now. Investors believe that without the need for a safe haven, and with little to no inflation on the horizon, why hold gold? My own belief is that attitude is extremely short-sighted. I believe gold has a life of its own and fears of inflation next year could spark a resurgence. The precious metal may fall even further over the next two weeks, and if it does, I would be using that decline as a buying opportunity.