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Can Wall Street Sail Through December After a Record November?

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Wall Street has completed a record-breaking November. The three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — rallied 11.8%, 10.8% and 11.8%, respectively. Additionally the small-cap centric Russell 2000 and the mid-cap specific S&P 400 jumped 18.3% and 14.1%, respectively.

The Dow registered its best monthly performance since January 1987 and the best November since 1928. The S&P 500 posted its best monthly performance since April 2020 and best November since 1928. The Nasdaq Composite recorded its best monthly performance since April 2020 and the best November since 2001. The Russell 2000 registered its all-time monthly high.

Meanwhile, economists, financial experts and market participants are busy assessing whether stock markets can withstand coronavirus-related shocks in December to conclude the pandemic-ridden 2020 on a happy note. Let's discuss briefly.

Possibility of a Vaccine and Reopening of Economy

The major driver of the fabulous stock market performance in November was progress in coronavirus vaccine development. At least three potential vaccine candidates for COVID-19 have been backed by impressive late-stage clinical trial data and are lined up for emergency authorization from the FDA.

Availability of a vaccine in the near future will be a game changer in 2021. Since the lockdowns imposed in March, the U.S. economy is operating at a significant sub-optimal level. The gradual reopening process, which was started in May-June, was jeopardized in late September as the resurgence of coronavirus forced several state administrations to impose fresh restrictions.

At this juncture, the availability of a vaccine and reopening of the U.S. economy, at least a large part of it, will have definite positive impact on stock markets.

Expectations for Fresh Stimulus    

The U.S. Congress will discuss this week whether to approve another coronavirus relief bill as a massive spike in new COVID-19 cases is slowing down U.S. economic recovery. On Nov 20, Senate Minority leader Democrat Chuck Schumer said that Senate Majority leader Republican Mitch McConnell has agreed to resume negotiations over a potential new Covid-19 relief package.

The first round of fiscal stimulus — known as the CARES Act — ended in July. On Nov 30, Fed Chairman Jerome Powell emphasized the importance of the continuation of lending programs the central bank has deployed to endure the pandemic.

Notably, the U.S. economy is growing at a slow pace over three to four months in spite of a new tranche of fiscal aids. At this stage, a fresh round of coronavirus-aid package will help the economy to regain lost momentum.

Technology Sector Remains Long-Term Driver

It was the technology sector that had helped Wall Street to exit a coronavirus-induced short bear market and form a new bull market. The Technology Select Sector SPDR (XLK), the largest sector of the 11-broad sectors of the S&P 500 Index, rallied an astonishing 76% from Mar 23 to Aug 31.

However, in September and October, the XLK tumbled 5.3% and 5%, respectively. Notably, the sector regained momentum in November rallying 11.4%. The cyclical sectors likely to gain as the economy reopens, such as energy, financials, industrials and materials climbed  28%, 17.5%, 16% and 12.4%, respectively. Nonetheless, the turnaround of the growth-oriented technology sector was the most important stock market feature of November.

Broad Based Recovery of Wall Street

The U.S. stock markets are the best destinations for investors. Between the post-recession era and the outbreak of the novel coronavirus, overall returns of U.S. stocks were nearly four times higher than the rest of the world.

After successfully recovering from the Great Recession, Wall Street also recovered overwhelmingly from the trade-related assault of 2018. Wall Street is poised to keep the flag high amid coronavirus-led devastations too.    

Year to date, the three major stock indexes of Wall Street — the Dow, the S&P 500 and the Nasdaq Composite — have rallied 3.9%, 12.1% and 36%, respectively.

Besides the large-cap specific three indexes, the small-cap centric Russell 2000 is up 9.1%. Another small-cap centric index, the S&P 600 is up 1.3%. The mid-cap centric S&P 400 is up 5.1% year to date. These reflect the broad-based, north-bound movement of Wall Street so far in 2020.

How to Pick the Right Stocks

At this stage, it will be prudent to invest in large-cap (market capital > $10 billion) stocks with a favorable Zacks Rank and our VGM Score of A or B. These companies have well-established businesses, solid liquidity and brand names.

Also, we have selected stocks with long-term (3-5 year) growth potential higher than the S&P 500 and have witnessed robust earnings estimate revisions within the last 7 to 30 days. These stocks have rallied more than the benchmark S&P 500 Index year to date.

Major stocks that fall in this category include General Motors Co. (GM - Free Report) , L Brands Inc. (LB - Free Report) , Laboratory Corporation of America Holdings (LH - Free Report) , Hologic Inc. (HOLX - Free Report) , PerkinElmer Inc. (PKI - Free Report) and Qorvo Inc. (QRVO - Free Report) . Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of above-mentioned six stocks year to date.

 

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