What a week. Violence at the Capitol. Big election surprises in Georgia. The highest rate of COVID deaths yet. The worst employment numbers in a long time.
But What About the Markets?
Yet, the stock market continued to move higher! And it moved to new all-time highs. We saw positive gains in nearly all equity regions, sectors, styles—with incredibly strong returns in mid- and small-cap stocks.
Small-caps, for instance, are now up about 30% since the presidential election* and approximately 50% since last summer**.
For a basic market outlook, as least in the near-term, as the saying goes, “A market that doesn’t go down on bad news, is a strong market.”
As for why the market moved higher, the basic premise behind the large gains of late is that the economy is expected to dramatically improve in 2021, combined with vaccine optimism and continued massive liquidity in the financial system via all-time record monetary and fiscal stimulus.
Let’s Talk Economy
Don’t be surprised if we experience the best economic growth in the U.S. since World War II, about 75 years ago. We haven’t seen 5% real (inflation-adjusted) GDP growth since 1984 (7.2%), and to get to the best growth since WWII, we also need to surpass 1950’s 8.7%. Give me the right odds, and I’ll take the “over” on both of these numbers.
Optimism, however, should be tempered with some caution. There are valuation (record highs by some measures) and sentiment (too bullish) issues, particularly with large cap tech stocks that have led the market change in recent years. There is also the potential issue of rising interest rates.
Meanwhile, in Politics…
As for last week, the riots in D.C. were shocking and disgraceful. It does seem that most people feel that way, which will hopefully create more much needed political common ground and also another reason for closure on the past administration. I believe those are positives for both investors and citizens. Common ground and compromise should be a better backdrop than chaos and conflict.
The run-off elections in Georgia, which gave the Democrats theoretical control in Washington, were a relative surprise to many election observers. Yet, the outcome was not disruptive to recent market trends—in fact, it only seemed to accelerate them.
In short, more cyclical fare, such as small caps and value stocks, outperformed. Interest rates also rose, with the 10-year above 1%. The yield curve (difference in long-term and short-term interest rates) also steepened, which helped financials.
The non-farm payroll employment numbers for November declined 140,000, well below expectation—clearly a negative number. However, positives do emerge. There were positive revisions to prior numbers. There was actually employment growth in most industries, with the notable exception being the slammed Leisure and Hospitality sector. Perhaps most important to note moving forward is that the negative headline is yet another reason for more fiscal stimulus.
What’s Coming Up?
Washington D.C. will, of course, remain in the headlines, including potential impeachment news. As for economic data, I think the inflation data later this week will be key to watch.
Bitcoin had another amazing week last week and is now falling sharply heading into the new week. Again, this is an intriguing asset class which is extraordinarily volatile and needs more maturity to become appropriate for many investors to use, in my opinion.
Recent Reads
Last week I finished Annie Duke’s popular “Thinking In Bets” Here’s a video summary. https://www.youtube.com/watch?v=x30-QFJLzLY . So many great tidbits on decision-making, including the phrase: “It’s all just one longer poker game,” which means to take the long view in decision-making—particularly good advice when it comes to reviewing year-end performance reports!
Related to that last comment, I also came across a great article last week: “Lessons from George Vanderheiden, one of the greatest investors I’ve ever known.” George Vanderheiden was arguably the most respected portfolio manager within Fidelity back in the day, but he retired late in the dot com era when it appeared his style of investing would never come back. (It did, of course, shortly after he retired.)
There are many valuable nuggets in this short article, including the concept of “client alpha,” which is the idea that having clients who are aligned with what you are trying to achieve as a fund manager is critically important. Otherwise, capital is often taken away at exactly the wrong time.
One more tip.The brand-new “Fill The Gap” podcast hosted industry legend and market historian Bob Farrell as its first guest. Great interview, including his “10 Market Rules to Remember.”
On the Scoreboard
Great NFL play-off games this past weekend, including wins from the Browns and the Bills, and a Brady vs Brees showdown.
In college football, tonight’s Alabama-Ohio State Monday night should be a great national championship game.
And your Big East college basketball update: Villanova nationally ranked #3 (USA Today), Creighton #5, and Xavier #27.
Have a great week! For more insights and commentary, visit our Financial Advisor Success Hub.
*https://media.bespokepremium.com/uploads/2021/01/The-Bespoke-Report-010821-566gs.pdf
**Morningstar Daily Index Returns data
0054-OPS-01/11/2021
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