OVERVIEW
We hope you had a nice Thanksgiving holiday. November was a surprisingly productive month given the concerns leading up to the Presidential election.

The S&P gained 10.8%, the NASDAQ gained 11.8%, and the bond market gained close to 1% in November. The big standout was small caps, as the Russell 2000 gained 18.3% for the month. Other than Google, the five largest U.S. companies told a very different story in November, as Apple was up only 3%, Microsoft up 4.5% and Facebook and Amazon were down over 1% on the month.
The first two Mondays ushered in a renewed wave of stock buying after Pfizer and Moderna announced their respective COVID-19 vaccine trials that resulted in more than a 90% efficacy rate. This “reopening” trade made the year’s laggards much more attractive to market participants, as value significantly outpaced growth, and small caps significantly outpaced large caps. Some days the moves were dramatic, where value was up over 2% and growth was down 2%. On other days, value gained more than 1% and growth was only up a little. Other days growth lead and value lagged, or small caps outpaced large caps.

In our opinion, even with the third wave of COVID infections surpassing both March and summer’s spread rate, the market is more comfortable looking past what will likely be the darkest days of the pandemic and toward a closer, more certain recovery in the middle of 2021 when the vaccines will be more readily accessible. With multiple effective vaccines now in sight the world will be in a better position to get back to normalcy. The light at the end of the proverbial tunnel has started to get much brighter than even a month ago, though the trip to that light will likely be the darkest yet. This has caused the market to broaden out more than we have seen in 2020, potentially strengthening the internal attributes by reducing the reliance on the biggest names in technology to be the primary market movers.

MARKET TECHNICALS
The technical landscape is also showing recovery and improvement, as the post-election bump pushed the S&P 500 once again above its 50-day moving average (DMA). Over the past three months the market has trended sideways, with some ups and downs but not making much progress. The market now is showing signs of a breakout, catapulting the S&P 5% above the 50 DMA as of the end of the month. Furthermore, the fact that more U.S. companies – big, small, growth and value – are participating in this uptrend is very encouraging, indicating a healthier market than one where the top five largest tech companies are the primary drivers of the market’s ascent. This November breakout also pushed the main market indices to new all-time highs, with the Down Jones Industrial Average and the Russell 2000 also recovering the February and March losses and closing the month at new all-time highs. To add some color to this broadening, the S&P printed a new high in mid-August, given the continued strength in the FANGMAN complex (Facebook, Amazon, Nvidia, Google, Microsoft, Apple, and Netflix) which were the beneficiaries of the “stay at home” environment, where the DOW and the Russell 2000 printing a new all-time high mid-November.

PORTFOLIO ADJUSTMENTS
While we started to observe a slight broadening of the market back in October, we were not convinced that a rotation to more economically sensitive stocks was durable enough to justify the risk. As we noted time and time again there were a few days pushed higher in these areas and then a quick reversal. But we were, at that time, reducing our exposure and reliance on FANGMAN but still holding an overweight growth bias.

As November continued to unfold, the exciting results of the viable vaccine trials as well as a more sustained push into value and small caps, we further, but gradually broadened out the portfolio to increase exposure to these other areas of the market.

The first tactical adjustment was to shift our position from SPY to RSP. SPY is the market capitalization weighted S&P 500 index fund that weights the components of the S&P 500 based on their size which results in some 25% of the fund in the top five largest companies in the US. SPY performed YTD mostly because of the gains from these top five companies, which are up between 37% (Google, Facebook, Microsoft) and 72% (Amazon).

This year has been a story of the top five and the other 495, one of the primary reasons that we accumulated shares of XLG from March through the summer, as the weight of those top five within XLG (S&P top 50) accounted for 42% of XLG’s weighting. However, that appears to be changing. RSP takes an equal weight approach to the 500 largest U.S. companies, weighting them each at approximately .25%. This will serve to benefit from more companies within the S&P carrying their weight, possibly providing greater gains than the top five over the near to intermediate timeframe. Those other 495 companies are also less overvalued than the top five and have room to play catch up and revert to their mean participation.

We also shifted another large growth position, PWB, to OUSA (large value) and IJR (small blend). These tactical shifts created more balance to the portfolio, bringing us closer to neutral (from substantially overweight large growth/tech), as well as down the capitalization scale to the bottom portion of the S&P 500 as well as adding some small cap exposure. If the market continues to hop from growth to value and large to small, we are better positioned to trend close with the broad market, as well as our benchmark, as opposed to being up more one day and up less (or down) on others, depending on how various areas of the market are doing on a day-to-day basis.

Simply put, we have increased our exposure across more areas of the market and have moved past a significant overweight in large cap growth, which has treated us quite well to this point.

LOOKING AHEAD
As we look ahead to the end of one of the most emotionally and economically challenging years in recent memory, we are excited about the prospect of moving past the grip that COVID has had on all our daily lives.

As we have repeated month after month, we will science our way out of this pandemic, and the past month gets us much closer to that becoming a reality. As the U.S. economy further emerges out of a short, but deep recession, we remain optimistic that we can return to a more normal world. This should enable the economy to expand again and increase risk taking by market participants. The cost cutting measures endured by public companies to try to survive during the pandemic should result in being leaner and more efficient in the years ahead. We anticipate growth and earnings to pick back up in lockstep with more people being comfortable living their day to day lives and returning to a normal routine of spending and innovating.

We also wanted to take a moment to thank you for the opportunity to be a prudent steward of your wealth and wish you a safe and enjoyable holiday season!