Making sense of the markets this week: November 23


Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

It’s déjà vu vaccine all over again as we make sense of the markets

This week began, like last week, with some very positive (and welcome) news on the vaccine front. As you may remember, on Mon., Nov. 9, U.S. pharmaceutical company Pfizer announced that their COVID-19 vaccine is 90% effective.

The markets and our collective hope that we’ll get to the other side of the pandemic sooner than later received another shot in the arm. This week, the good news was courtesy of pharmaceutical company Moderna—and they upped the ante, suggesting their vaccine is shown to be 94.5% effective. Not to be outdone, Pfizer came back with updated data to show their vaccine is actually 95% effective

I like that trend. And so do the stock markets, as this next item suggests: 

U.S. stocks get an initial boost, set a new record

U.S. and global stocks hit a record on Mon, Nov. 16, on the positive vaccine results released by Moderna. 

However, that enthusiasm soon faded, with U.S. and global stocks receding midweek and into Thurs., Nov. 19. 

Meanwhile, Canadian stocks (the TSX Composite) are about 3.7% below their all-time highs. 

We now have an epic battle of sentiments—between the enthusiasm for positive vaccine news, and record numbers of global daily new cases and deaths from COVID-19. The new waves of the pandemic are most prominent in North America, Europe and parts of South America. We can add in India and Russia as well. 

Two forces have created an ironic dichotomy, as vaccine-inspired optimism runs head-on into the current reality of the worst of the pandemic. 

North American and global stock markets have been more than resilient and forward-thinking in 2020. Will hope be enough to keep stock markets at lofty levels? The resurgent second and third waves of COVID-19 have led to new lockdowns in parts of North America and Europe. 

I think this will be the story over the next few weeks and months. 

Tesla manoeuvres into the S&P 500

When we made sense of the markets for the week of Sept. 14, we noted that Tesla was snubbed by the S&P 500. At that time, the world’s leading electric car and truck manufacturer was eligible for inclusion, but the S&P 500 committee decided to take a pass. 

But the success and drive of Tesla are just too much to ignore, and the company will take a spot in the most popular stock index in the world as of Dec. 21, 2020. 

And Tesla will set a record as it parks in the S&P’s top 10. At current stock prices, Tesla is one of the top 10 most valuable companies in the U.S. Remember the S&P 500 index is cap-weighted, meaning the most valuable companies have the greatest weight in the index. The current value of Tesla is above $380 billion. To determine a company’s value, you simply multiply the stock price by the number of outstanding shares. Think of this as how much would it take to buy the entire company. 

This will be the highest initial ranking for a new constituent of the S&P 500. 

There’s currently more than $11.2 trillion in assets benchmarked to the S&P 500, with roughly $4.6 trillion of the total in indexed funds, according to S&P Dow Jones indices. Mutual fund and ETF providers will have to purchase Tesla stock to match the index. That has contributed to driving the Tesla stock price even higher. 

The stock has more than quadrupled in 2020. 

U.S. ETF market tops $5 trillion

And speaking of indices and ETFs: An undeniable trend in the investing universe is the move from mutual funds to exchange-traded funds, due to the lower fee structures of ETFs. Those S&P 500 ETFs and the U.S. markets lead the world in ETF adoption

From that article…

“The Exchange Traded Fund (ETF) industry in the U.S. surpassed $5 trillion in assets under management last week, a new record. Record highs for stocks was a big help, but over $400 billion in new money has poured into ETFs this year, only the second time it has passed $400 billion in a single year. By comparison, inflows stood at $246.6 billion at this same point last year, according to ETF.com.”

Canadian ETF numbers and trends lag those of the U.S., but Canadians are certainly also moving to ETFs en masse. Again, Canadians pay some of the highest fees in the world for mutual funds that are mostly actively managed. The majority of ETFs are invested in passive funds. That enables those lower fee structures. Actively managed funds largely underperform over longer periods, a trend that continued in 2020

That’s why I continue to like and hold BlackRock stock (they offer iShares ETFs). U.S., Canadian and global investment dollars continue to collect in ETFs. BlackRock is the global leader in ETF assets. 

BlackRock is up over 33% in 2020, not including dividends. 

Asia is heading one way, the west the other

As we’ve previously mentioned in this column, Asian countries mostly have the pandemic more under control, and they are seeing greater freedom of movement and greater economic growth

From that CNN post… 

“The promising news out of Asia stands in sharp contrast to the West, where many nations are grappling with a resurgence of COVID-19 and have been forced to once again impose restrictions in an attempt to bring their outbreaks under control. Federal Reserve Chairman Jerome Powell reiterated last Thursday that the U.S. economy will need more stimulus from both the government and the central bank to get through the crisis.

“The Bank of England warned earlier this month of a double-dip recession for the UK economy as the country re-entered national lockdown. The European Union is facing a similar fate.”

With the pandemic running free in much of the West, we may continue to see this trend accelerate into 2021. We’ll need that vaccine to come to the rescue. 

Here’s a great chart on returns for various regions, which was tweeted by Mike Philbrick of Resolve Asset Management:

Source: S&P Global

Bitcoin update: Looking to take out all-time highs

Investors may consider Bitcoin a portfolio asset—”digital gold” in a portfolio setting. While the digital currency was once viewed with strong suspicion, just about one month ago PayPal made the announcement that they would support Bitcoin and other cryptocurrencies. 

Since that Oct. 23 mention in this column, Bitcoin has been on an incredible run: It’s up some 38%. The Bitcoin price increased to $18,000 US from from $13,000 US in quick order. And that’s not a brag. Bitcoin is an incredibly volatile asset that could fall just as quickly. (The currency recorded its highest price ever in December 2017, hitting $19,783.) 

And certainly, this column should not be considered advice. There’s nothing like Bitcoin and cryptocurrencies to generate a divisive debate among investors. Each investor will have to make up their own mind. 

We are seeing some outrageous calls, such as this Citibank analyst suggesting a $300,000 price for bitcoin by December 2021. I’ll continue to report on Bitcoin and I am putting together a dedicated post that will outline Bitcoin and other digital currencies.

In the interest of transparency, I have some modest Bitcoin exposure by way of this Bitcoin fund from 3iQ. I also hold gold price and gold stock ETFs. 

Stay tuned. 

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com

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