December 11, 2020: Market Minute: Into 2021

Markets continue to show no signs of concern as new highs develop
in Q4 and bullish trends hold (Chart 1). The S&P 500 recently posted a new all-time high of 3588.11 and the TSX is retested an all-time high near 18,000.

Another welcoming sign for markets in 2021 are the sectors in the benchmark S&P 500. The industry groups that are performing best over the last 90 days are a promising sight. Industrials, Financials, Base metals, Consumer Discretionary and Communication services are all outperforming the S&P 500 (Chart 2). The bottom four sectors are all safe haven groups. Real Estate, Utilities, Health Care and Consumer staples are all defensive industry groups. The market is moving away from these “risk-off” groups and staying with “risk-on” sectors. The same action applies to fixed income. The market has been steadily moving away from bonds in Q4 (another safe haven security) and going for growth (stocks).

The recent rise in performance from the Base metals sector is an indication of how advance the market cycle is. Base/Industrial metals (i.e. copper, zinc, lead and nickel) normally start to perform well about halfway through a market cycle. As the bull market has progressed for about 11 years and that, on average, secular bull markets continue for about 18 years (i.e. 1920 to 1930, 1950 to 1970 and 1982 to 2000) this advance in performance from the base metals sector is like a road sign signally that there is more upside coming for the stock market.

Another key indicator of market duration is the U.S. Yield Curve (Chart 3). This economic indicator has an unblemished history of leading the stock market since the 1940s. At this junction, the curve is in a normal position with short-term rates lower than long-term. This action indicates that the Fed has room to accommodate upside growth in the economy and control expansion. A signal that the economy and market are near the end of their growth is when short-term rates are near or above long-term rates.

Bottom line: The current bull market is showing no signs of exhaustion as it enters into a new year. The long-term trend, the "risk-on" sector strength performance and the position of the U.S. Yield Curve all highlight and reinforce the positive outlook in 2021.

Our models point to 4,135 as the target for the S&P 500 and 19,000 for the TSX.