02.12.2020 15:30

Market Outlook: A strong stock market month, mainly boosted by vaccine expectations

Share prices fell slightly on the last trading day of November 2020, but as a whole it was a strong stock market month. America's Dow Jones Industrial Index had its best month since January 1987, while the S&P 500 equity index and the Nasdaq Composite showed their best performance since April 2020 − fuelled by optimism about COVID-19 vaccines and the recent presidential election, which delivered a clear winner despite Donald Trump's legal actions.

President Trump has taken further small steps towards admitting his defeat, saying he will leave the White House if the Electoral College chooses Joe Biden as president, but Trump continues to claim election fraud.

Strong statistics in China

In recent days, strong purchasing managers' indices have been published in China. Official PMIs for both the manufacturing and non-manufacturing sectors rose, exceeding consensus estimates. The Caixin/Markit manufacturing PMI reached 54.9, a 10-year high, well above the threshold of 50 denoting expected economic growth.

Expanded quantitative easing (QE) programme in Sweden

In line with our forecast, the Riksbank expanded its QE programme at last week's policy meeting. The Swedish central bank expanded the programme by SEK 200 billion to a total of SEK 700 billion and extended its asset purchases, due to conclude at mid-year 2021, until the end of the year. As expected, the Riksbank left its repo rate path unchanged, and its Executive Board continues to signal an unchanged key interest rate until at least the end of 2023. The Board continues to leave the door open for a key rate cut from the current 0%, but nothing in its policy announcements indicates that it has moved closer to enacting such a cut.

Worries among small businesses, but not among investors

There is great concern about rising COVID-19 infection rates and new restrictions in many countries, especially among small businesses, but investors view these problems as transitory and are piling into cyclical sectors like banking and energy. Expectations about COVID-19 vaccines are among the main drivers behind the market upturn. On November 30, the pharmaceutical company Moderna also applied to US and European Union authorities for emergency use authorisation, which would enable it to begin vaccinations as soon as possible.

In light of increased coronavirus spread, fourth quarter statistics are also showing a stronger US recovery than expected. Some metals, including copper, have climbed to their highest prices since 2014 on news of accelerating global economic recovery, especially in China, and in anticipation of an expected US transition to electric cars following Joe Biden's victory.

Our market view

Now that November is history, we can note that it was a very strong stock market month.

The situation is now considered more stable, though the world has suffered a new setback as the spread of COVID-19 increases. Encouraging indications about impending vaccines and a US election outcome that was well received by investors will help us feel more confident, allowing us to lift our gaze to 2021 and 2022. We will gradually reopen our societies in 2021 and at least partially return to pre-crisis patterns and behaviours. If we react as we usually do, there should also be a pent-up need for things we were forced to give up during the pandemic.

The return to a more normally functioning society and a more robust economic situation will continue to be supported by central banks, which will ensure that there is plenty of liquidity in the system over the next few years and that key interest rates and government bond yields do not skyrocket. At the same time, we will see unusually far-reaching fiscal stimulus programmes. As the recovery strengthens, these programmes will shift from emergency responses to forward-looking initiatives, for example as part of a worldwide green transition.

This clear improvement has already been discounted by the capital market, and last spring's stock market declines have been reversed. The price of financial assets has risen significantly and is now quite high from a historical perspective. The sharp upturn during November means that various indicators of current thinking among investors are signalling an optimistic view and a general increase in risk in their portfolios, a development that normally limits upside potential and makes markets more sensitive to negative news.

However, this is balanced by a bright medium-term forecast for both GDP growth and corporate earnings. Interest rates and bond yields are also extremely low and are expected to remain so for some time to come, which means there are few alternative sources of returns. This will affect relative prices and create tolerance for higher asset valuations.

Given the encouraging overall economic outlook, we are sticking to our recommendation of an overweight in equities and other risk assets, but historically high pricing after the sharp upturn is a good reason for caution in a short-term perspective.