Steady Climb

It appears the S&P 500 hasn't skipped a beat with the turn of the calendar. After finishing up the second strongest November on record, the index added another 2% to start December. The stellar performance sits against a backdrop of a virus that is once again spiraling out of control and a second lockdown taking shape. Though lockdown 2.0 is less severe, it is without a doubt weighing on the economic recovery. Still, the market continues to look through the surge and on to the promise of a Spring vaccine. This makes sense for the long-term investor, but we are, without a doubt, overbought in the short-term. 

With the action of late, we have begun to see signs of euphoria building. The put/call and bull/bear ratios are entering extreme territory. In addition, over 90% of the S&P 500 is now trading over its 200-day moving average. History shows that this is often bullish for 12 month forward returns, but the short-term is less certain. In particular, we continue to see the potential for a scare as the Georgia Senate elections unfold and vaccine makers work through logistic problems. It is unlikely that it will be as smooth sailing as the pace of the current market suggests.  

Still, we believe the building blocks of a secular bull market remain in place. The Fed continues in its role as a backstop, and Congress looks to finally be headed towards a deal on a second relief package. If a vaccine is successful in ending the pandemic by the end of Spring, there is fuel for rapid economic expansion. Companies have been using the pandemic as a springboard for digitization and other tech-driven initiatives. We believe that some companies have pulled forward their timelines by 5 to 10 years in response to the demands of the pandemic. Combined with an enormous Fed balance sheet and generous Treasury spending, we feel it is likely the economy will be uniquely positioned for growth.  

The key question for the longevity of the bull market lies in inflation. Right now, every effort is being made to stoke inflation. So far, these efforts have been unsuccessful. Secular forces continue to weigh on inflation alongside the short-run impact of the pandemic. However, when the pandemic subsides, we will need to see productivity accelerate to keep pace with the substantial growth in the money supply we have seen over the last year. We'll need to see the tech-driven changes at companies pay off, and the Fed let off the accelerator in just the right way. It will be tough to stick the landing, but this is something the market doesn't appear to be overly concerned about. We have our eyes on this, but for now, we are looking forward to the end of the pandemic as well. 

Thanks,  

Preston May, CBE®
Research Analyst

This report was prepared by Donaldson Capital Management, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser.

An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios, and investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.

S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.