Here we are, two months into 2021, and there is already a long list of fears facing investors. Many are not new, but since the elephant left the room on January 20th, it may be that the media and investors now have more mundane things in their minds. The pending stimulus, the recent spike in interest rates, rising inflation expectations, meme-trading on Robinhood, commodity price spikes and supply chain fractures, chip shortages, and SPACs (Special Purpose Acquisition Corp) are all now cause for concern. With that as a backdrop, the market jumped into action in February with stocks increasing 2.7% for the month and raising the return of the S&P 500 to 1.7% year to date.
The main event in February that touched so many households was the winter storm that swept across the country. Texas seemed to bear the brunt: the unprecedented storm hit with record low temperatures and led to the failure of the electric supply grid causing widespread blackouts and clean water crises. This will protract the recovery process, amidst the pandemic and an economy struggling to put millions of people back to work.
Whether it’s the virus, the economy, the weather or politics, people across the country are beginning to reach their limits. While more vaccines are rolling out each day and there is positive news of collaboration between Merck and J&J, the virus persists; new case counts are similar to where they were last October. The end of the pandemic, and springtime, cannot come soon enough.
While possibly a by-product of the pandemic, certain aspects of investor behavior are cause for worry and are a troubling echo of the late 1990’s. After an immense 150% return in 2020, ARK Innovation’s fly-wheel-like ETF has taken in more assets than any fund besides Vanguard S&P 500 ETF, according to Barron’s. Robinhood offers investors an app-based free trading platform and many of its users gather on Reddit to both promote trading schemes and, curiously, to bait one another. Herd behavior is not unfamiliar on Wall Street. A recent and shocking instance was after Hertz filed for bankruptcy in May of 2020. Robinhood investors herded in. Hertz leapt on this and issued more of the hyped shares to the public. The investors that did not sell were ravaged when the stock was delisted by the exchange on October 30.
More fundamentally, the Federal Reserve says it remains committed to low interest rates for the foreseeable future. Yet, as the yield curve has shifted, the interest rate markets apparently are not taking the Fed at its word. In my opinion, while there may be some disturbances, I do not think rates are headed appreciably higher, nor do I think ‘70’s style inflation is brewing. There may be temporary dislocations (used cars, appliances) and yes, certain commodity prices (copper, oil) have risen, but I do not think these are longer cycle issues.
I am encouraged to see impressive 4Q 2020 earnings and revenue growth. Forward guidance, something many companies suspended, is generally strong, and forward S&P 500 estimates are trending higher. Stocks in general are expensive. According to Ned Davis research, the total market cap of all stocks, as a % of GDP (similar to the Buffett Indicator) is over 200%, well above its historic range. I’ve said this before but we are stock pickers – and expect to continue to be able outperform, in any variety of market backdrops.
While we are growth investors, we also are well aware of the market’s tendency to re-orient itself now and then. It’s not often, but value stocks (measured by the Russell 3000 Value and Growth indices) did outperform growth stocks in 2007, 2014 and 2016. In each of these instances, our patience staying with our core growth names paid off handsomely in the subsequent periods. Our focus is on both quality stocks and stocks that stand to benefit the most as the recovery continues to unfold. Quality often lags when investors become starry eyed (greedy) but it stands tall when fear and uncertainty are driving the market.
We always look forward to catching up with you. If we have not been in touch recently, or it you need some help accessing your tax information, please do not hesitate to reach out. In the meantime, please be safe out there.
Bruce Hotaling, CFA
The views and opinions stated herein are those of Bruce Hotaling, are of this date, and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Investments are subject to market risk, including the possibility of loss of principal. Past performance does not guarantee future results. The S & P500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index. The PE ratio (price/earnings) is a common measure of relative stock valuation.