Market Review – December 2020

In this month’s market review, our Chief Options Specialist, Jason Ayres, reflects on the December market conditions.

The Canadian and U.S. stock markets experienced some wild swings ahead of the U.S. election as investors hoped for the best, but anticipated the worst for the election outcome.

The Biden win was a clear catalyst for the markets to continue their upward trajectory. Considering the circumstances, the resilience of both the U.S. and Canadian stock markets has been historic.

The unprecedented fiscal and monetary stimulus injected into the system has certainly gone a long way to support asset prices and liquidity.

With low interest rates, which should remain in place for the foreseeable future, low yielding bonds will remain unattractive and investors should continue to move into equities in search of a real return.

That said, investors shouldn’t lose sight that significant uncertainty remains. Some segments of the economy will take a long time to recover as the world continues to deal with the COVID-19 pandemic. In the upcoming months, we can expect some market sectors to do better than others.

Plus, the U.S. election results will likely impact the markets. At the moment, there are still two senate seats up for grabs. If the democrats win both seats, we could see some changes. However, if the republicans win one or more, it will be closer to status quo.

If the polls start to show a democratic lead, we can expect some market volatility. At the moment, the Vix futures curve, which measures market volatility pricing, is in normal contango, indicating that the market is not factoring that added risk. This could change.

Given both the political climate and the pandemic-related considerations, the option market continues to price in uncertainty.

In January, we expect the markets to maintain their upward bias well into the new year given the shape of the political landscape, unprecedented monetary and fiscal stimulus worldwide, and the hope of returning to some sense of normalcy in 2021.