Q4 - January 2021
Quarterly Commentary
An incredible year in the market was wrapped up with an incredible quarter, which included the best single month EVER in both the Russell Small Cap Index and the Large Cap Value index. Our October commentary spoke about an inflection point, and that is certainly what we got in the fourth quarter. Value stocks gained ground on the growth stocks that have dominated much of the past few quarters. Looking at the sectors and factors, it was a bit of a worst-to-first theme, as the Financial and Energy sectors, along with the more cyclical and more down-trodden names, bounced the most as vaccine hopes set in. The WSJ called it the “everything rally” ¹, as commodities, international and US stocks all rose more than 35% from the lows in March – a feat which last occurred in 2009 after the Financial Crisis. Crude oil finished above $48, down from $61 a year ago, but let us not forget that some oil contracts traded below $0 in April.
The 10-year US Treasury bond yield rose from a record-low of 0.52% on August 4, to finish the year at 0.89%, still a full percentage point below where it ended 2019. The low yields have been a huge support to valuations of all sorts of assets and have added fuel to the speculation that we have seen in cryptocurrencies and stocks like Tesla. Speculation is a part of how every market works, but there was a clear ramp up in the breadth of speculation during 2020. JMP Securities estimated that individual investors opened more than 10 million new brokerage accounts in 2020, a record. ² This increased participation clearly showed up in a handful of stocks, along with the options market where small contract volume skyrocketed. What was most unique about the market in 2020 was that while very few companies clearly benefitted because of the pandemic, the few that did, happened to be the mega-caps like Amazon and Apple. This only amplified the difference in performance between indices like the NASDAQ 100 and the broader market or smaller cap indices, but this trend was at least paused in the fourth quarter. For perspective, over the past two years, the Nasdaq 100 has more than doubled in price, which was more than twice the performance of the S&P 500 Equal-Weighted index.
In Conclusion…
With the new year comes new hopes and expectations. We are in the crowd that expects more movement and greater confidence. Living in Florida, where activity has been less restricted compared to other states, has helped us to maintain the perspective that life will in fact return to something close to what it was like before last March. All businesses have been forced to adjust their practices, but very few have been a part of the solution. It is amazing to think of what the medical community has achieved both in terms of handling the virus and developing both treatments and vaccines. The latter is an achievement that was thought to be impossible last spring, and for good reason. If we continue to climb out from this virus, we should expect more of what we witnessed during the fourth quarter at least in terms of leadership, but the speed and amplitude should wane. The biggest risk for the equity market is likely to be determined by Fed policy and the bond market. The Fed has anchored expectations for low rates for as long as it matters, and as mentioned above, the current elevated valuations are tied to these low rates. We have seen “tantrums” before as the Fed’s conviction in similar positions have waivered or as they debate the proper course. A better economy or not, higher rates could certainly ruin the party within the market.
Lastly, we wanted to thank you all for your support through this transition in our business from National Investment Services (NIS). Separating from NIS certainly raises mixed feelings for me personally. We still count them very much as friends, but we appreciate this new independence. I will be forever grateful for the leadership and support that they provided us over the years.
While life may return to normal in 2021, we have grown more accustomed to communicating with our clients and consultants in new and different ways. We always welcome office visits, but we are happy to schedule more frequent phone or video conferences with you.
Happy New Year!
Tyler Pullen, CFA
Portfolio Manager
¹ “From Stocks to Bitcoin, Investors Bet the ‘Everything Rally’ Will Continue”, WSJ, Amrith Ramkumar Jan 3, 2021
² “New Army of Individual Investors Flexes Its Muscle”, WSJ, Caitlin McCabe, Dec 30, 2020
Past performance does not guarantee future results. Market conditions can vary widely over time and can result in a loss of portfolio value. In accordance with the rules of the Securities and Exchange Commission, we notify you that a copy of our ADV, Part 2A filing with the SEC is available to you upon request.