Closing Thoughts for the Week

Traditionally, December has been a good month for equities and the current lack of volatility in the market would be supportive of that idea this time around. Remember, however, that last year’s 6% loss in the S&P 500 was the index’s 3rd worst December performance of the past 30 years. Probability doesn’t equate to certainty and investors would be wise to continue keeping their guards up instead of going all in.

November has unquestionably been a good month for the major asset classes, but now we enter the period where we must see if those gains are sustainable or it’s just the latest bear market rally. I’ve been saying that small-caps are the key here because valuations are likely going to become much more important in the coming months. I’m still of the opinion that short-term risk-on conditions could sustain for now, but are also likely to shift come December.

If this is a big risk-on move for the markets, only mega-caps got the message, which is not a good sign for a sustained move higher. There’s pretty clearly an oversupply of government bonds out in the marketplace right now that is unlikely to be quickly absorbed with the Fed now shrinking its balance sheet. That could potentially hinder a flight to safety trade.