As we approach the end of 2020, let's take note of the current factors affecting equity markets and what might be ahead for next year. Our Market Factors Checklist:

1) Monetary - In response to this pandemic, central banks worldwide have committed to supporting their banking systems with massive cash injections. In the case of the Federal Reserve, it continues with asset purchases of US treasuries and mortgage-backed securities to the tune of $120 billion a month for the near future.

2) Fiscal – The US Congress has finally agreed to another post-election $900 billion dollar relief package for individuals and businesses devastated by COVID-19 lockdowns. Relief is needed, but printing money comes at a cost of higher inflation and increased deficits.

3) Valuation – By many measures, the equity markets are overvalued. As an example, the ”Buffett Indicator”, a measure of aggregate market value to US Gross Domestic Product, is now 75% higher than the historical average and is above the level last seen in the dot-com bubble!

4) Sentiment – Multiple measures of the sentiment of traders and investors have shown an excessive amount of bullishness (a contrary indicator). From opinion surveys, to put/call ratios to factor-based models on various asset classes, all have shown extended periods of overbought levels.

5) Supply/Demand for Stocks - Corporate stock buybacks, which was a big influence during the market's multi-year rally, plummeted in 2020 by 54% to $390 billion, while new issues and secondary offerings have gained by 50% to $510 billion adding more product for the market to absorb. These factors alone won't likely cause alarm, but this bear will be watching closely.

6) Momentum – Equity markets still have the wind in their favor, with no clear breakdowns in market breadth. Dips in prices such as this past Monday continue to be bought successfully (for now).

Next week, we will present our 2021 Q1 and yearly outlook.

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