Wednesday, January 6th, 2021
“Stocks were a lone bright spot in 2020”
It is hard to believe that less than 10 months from a historic market selloff and an unprecedented economic shutdown, we are talking about an overheated stock market at all-time highs. Yet here we are, turning the calendar to a new year with Americans finding some level of solace from this historic rally in stocks.
Last year was unique in more ways than one, but there are also some similarities to past market cycles. We see a lot of resemblance to the late 90’s with tech and growth stocks lapping the field and investors starting to extrapolate recent trends with, in some cases, excessive exuberance. There are also similarities to 2008-2009 with drastic levels of fiscal and monetary stimulus amidst a surge in market volatility.
Even though value and cyclical stocks closed the year with relative strength, the dispersion in winners (growth) vs. losers (value) has rarely, if ever, been higher. As the table below shows, from large to small cap growth vs. value, the dispersion was between 30-36% in terms of relative outperformance for growth stocks.
Source: J.P. Morgan
It is hard to know when this trend will reverse course, but the relative valuation of growth vs. value companies is approaching unchartered waters. Perhaps a pick-up in economic activity in 2021 could be a catalyst for value stocks to close the margin. Regardless, given where the market was at in late March, even value investors should be happy with their returns over the past 12 months.
The question investors need to consider now is not whether things in the economy will improve. They undoubtedly will. But, has that already been priced in from the market’s recovery? The market is forward-looking which is why things can look so rosy for Wall Street when Main Street remains on life support from the Treasury and Fed.
There is no doubt the fiscal stimulus has a lot to do with the swiftness in this recovery compared to past market cycles. In comparing the stimulus programs from the 2008-2009 market meltdown, most of that money ended up on bank balance sheets and very little actually made its way through the economy. In the case of the CARES Act and other recent stimulus measures, businesses and individuals received checks to spend (or invest), and the money supply jumped over 25% in a matter of months.
This “velocity” of the money supply is one of the main reasons the market surged to new all-time highs so much quicker than it did in the 2008-2009 meltdown. Perhaps we learned how to “vaccinate” the economy this time around.
It would be comical to go back and read any forecast heading into 2020, or even the grim commentary at the depths of the market meltdown in late March, and then look at what followed those prognoses. If 2020 taught us anything, it is that short-term market forecasts are hard and anything but reliable.
It seems like things can only improve for 2021 as it relates to the economy and sentiment in general, but that does not guarantee us anything as it relates to the market’s follow-up act. After all, we won’t know until next year if things ended up better or worse than we expected.
Jack Holmes, CFA®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. There is also no assurance that any investment strategy will assure success or protect against loss.