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T2 Asset Management

Dec 2020 Market Commentary

So now what? Well, the election seems to be behind us, and we hear rumors of several companies having effective Covid-19 vaccines coming soon. Of course, this can’t happen soon enough since we are all getting really tired of these masks. For many, the Thanksgiving holiday wasn’t the big family gathering we were hoping for, but thankfully, 2020 will soon be behind us, and we say don’t let the door hit you in the you know what on your way out!

The markets have had a strong month with a rally beginning even before the election was over. Below we see the last 7 months of trading, and you can see we are near the top of the range we have been in for several months. This is certainly helpful for our investments, but the real question is what happens next?

The economic front continues to improve as the most recent GDP reading came in at 33.1% versus the 31% expected. Payrolls were up by 638,000, higher than the 600,000 expected, and finally, retail sales were up 0.3% versus the 0.5% expected. It is nice to see things improve but do keep in mind that we are still in a big hole for the year. The economy took quite a hit from the virus, and it seems unlikely that it will recover as quickly as some predict. This has made the stock market extremely expensive unless the rosiest of scenarios plays out. Below we see the Price/Earnings (P/E) ratio for the S&P 500 going back nearly 100 years. The only two higher points were the dotcom boom and the financial crisis of 2008.

We realize the economy is healing and Covid-19 may soon be behind us, but it doesn’t help solve the overvaluation problem. We will need a huge economic boom to solve this, and we remain unconvinced that one is coming if states remain shut down. We do understand that with the Federal Reserve pumping large amounts of money into the system and keeping interest rates to zero, stocks are the only game in town. So, for the time being, the market holds at these expensive levels and ignores historical wisdom. Maybe this time is different, but we doubt it. Nimble investors can continue to play along and capture gains in this environment but be careful about thinking this is where the bull market starts and not ends.