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Weekly eLetter 11/20/2020 —Time to Increase Market Portfolios Toward Stocks?

As readers know, we look at market indicators in a short-term (6 weeks or less), medium term (up to 3 months), and long-term (typically 6+ months). We do this because each of those indicators sort of like to tell their own story, which may be a bit myopic.

In an ideal world it would be nice if the short, intermediate, and long-term timeframes would just all indicate the same market outlook. However, it’s not an ideal world. Nevertheless, at this time, in the short and intermediate term markets are in an uptrend. The longer term is still uncertain, but the positive shorter terms give us some positive indicators to work with.

I note that the post-election rally continued last week, and economically sensitive value stocks led markets higher on news of a vaccine that is 90-94% effective against Covid-19. In contrast, this promising news came in the middle of a continued rise in both Covid cases and deaths, leading of course to more talks about lockdowns globally and in big cities here in the US.

Continued volatility will be expected as all of us weigh the pandemic’s continued effect on the recovery. Still, I believe that investors should consider increasing their market exposure for several reasons.

Our old favorite indicator, the Junk Bond Indicator, is in a very positive configuration. This is a reliable indicator as market forces that are favorable for high yield (junk) bonds also give a positive environment for stocks. Do keep in mind that ‘Junk’ is almost a term of endearment. Yes, the ‘safety’ factor is less than government bonds (for instance) but the higher risk is offset by the higher reward, at least that’s the theory. Of course, your mileage may vary.

On the equity front, within the US markets leadership is shifting from large caps to smaller caps.  This is usually a sign of a healthy market that is displaying broader participation during rallies – and also showing an improving economy.

The Fed – let’s face it, has RARELY been this accommodating, and more stimulus is likely to be passed in Congress now that the election has passed. A stimulus package will likely also benefit small companies (and be positive for small-cap leadership!).

Although certain sectors are becoming a bit overpriced (in my opinion), and with the stronger market breadth we are not likely to see a broad overbought market. That’s also good for investors.

Sooooo…while the future is always unknown, and it’s a good idea to focus on your personal risk management, especially during talk of more shut-downs, I feel that this is a good time to take advantage of opportunities as we move into what is historically a seasonally favorable time of the year for stocks. And speaking of seasons, once again the Great American Feast is just around the corner. Accordingly, we offer this:

Thanksgiving is more than the festivities. It gives us time ponder upon what lessons we have learned and how we can spread happiness around, to look back at all the great memories and good people who came in our lives.

Happy Thanksgiving to you and your loved ones!

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