Now that we are a few weeks into the new year, I wanted to look forward a bit and briefly discuss some of the things I’m questioning and watching this year. I like to go through this process each year to force a review of my thinking and the strategies that come from those thoughts that I pass along to you.
Will stock concentration continue?
Five stocks represent a quarter of the S&P 500, which is the largest weighting for five stocks since the early 1970s. It’s hard seeing this continue, but it’s harder to come up with a reason why it won’t.
Will value come back?
Over the last 5 years, the Russell 1000 Value Index has grown by 9% a year. Not bad, except when you compare it to its growth counterpart, which has grown at 21% a year. Maybe we should be talking less about value being dead and more about growth being impossible to keep up with.
One of the reasons for the discrepancy in returns has to do with the difference in sector weights. Value has 29% fewer technology stocks and 26% more financials, industrials, and energy. The spread between value and growth on fundamental factors is as wide as it has been since 1999, and on some metrics, it’s even wider. But is it different this time? You cannot rule it out.
Will the stocks that benefited the most from Covid continue to outperform?
The world looks different today than it did a year ago. People are working from home, and they are wearing masks in the street. Some parts of our lives and some parts of the economy are changed forever. The question is, has the market already discounted all the change and then some?
Zoom, Peloton, Docusign, Teladoc, Shopify, and Wayfair gained an additional $300 billion in market cap this year. For comparison, that’s twice as much as the combined value of Delta, Las Vegas Sands, Marriott, Royal Caribbean, and Simon Property.
Again, the Covid beneficiaries added twice as much in market cap this year as the combined value of the badly hurt names by the virus. Did the market get this right? Does the gap narrow this year, or does it continue to widen?
Irrational Behavior
Investors went a little crazy this year. And I don’t mean in the way that Zoom gained $100 billion in market cap. That might be justified. But what investors did after Apple and Tesla announced that they were splitting their stocks was absolutely insane.
Apple announced a stock split on July 30th. On July 31st, the stock gained 10.5%. That was its second-best performing day of the last decade. $172 billion in additional market cap was added one day because investors were getting four shares for every 1 they had previously, with the price of their shares getting cut by 75%. In theory, this shouldn’t impact the value of a company. In reality, it really it did!
Will investors continue to ignore things like common sense? Investor behavior is impossible to predict, but I’m really looking forward to seeing whether or not 2021 is a continuation of what feels like irrational behavior because often such behavior ends badly.
Where does the Dollar Go?
Maybe all that money printing is finally catching up with us. For the first time in a long time, the mighty dollar is starting to show signs of weakness. This has implications for the global economy and implications for U.S. investors.
A weaker dollar is good for gold and good for non-hedged foreign stocks. Gold quietly made an all-time high earlier in the year, and international stocks are showing signs of life, after doing a whole lot of nothing over the last decade.
International developed stocks (EFA), think Japan, United Kingdom, have only outperformed U.S. stocks once in the last 8 years. This is another one of those things that shouldn’t continue forever, but it’s hard to make the case why it wouldn’t.
Will we see more institutional adoption of Bitcoin/Cryptocurrencies?
Speaking of dollars, it has been a wild year for Bitcoin. Until recently, Grayscale’s Bitcoin was the only way for U.S. investors to access bitcoin in a listed fund. But recently, competition is showing up, providing investors more options.
Until now, Bitcoin/cryptocurrencies have been mostly a fringe asset and has not had a place in the portfolio of 99% of investors. What happens if institutional investors start to get involved?
Will the yield curve continue to steepen?
The yield curve, historically one of the most predictive economic indicators, went negative in 2019. That got a ton of attention at the time. Once again, it preceded a recession, albeit one that had nothing to do with the underlying economy. Be that as it may, right now it is at a 3-year high and I see few people talking about it.
A steeper yield curve, again, in theory, is good for economic growth and rising inflation expectations. With the Fed committed to keeping short-term rates low for the next few years, this may continue to widen, and maybe longer-term bonds start to outpace inflation.
And What About SPACs?
What Is a Special Purpose Acquisition Company (SPAC)? It is a company with no commercial operations that are formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company.
Also known as “blank check companies,” SPACs have been around for decades. In recent years, they’ve become more popular, attracting big-name underwriters and investors and raising a record amount of IPO money in 2019. In 2020 SPACs raised $64 billion. And they’re just getting started.
According to Goldman Sachs, $61 billion in SPAC IPO proceeds are currently searching for acquisition targets. I cannot wait to see this. There are going to be some spectacularly bad deals come through.
It’s always hard to see things changing. And then along comes a year like 2020. Nobody had any of this on their list at the end of 2019. 2021 is sure to deliver some surprises, and unlike the last dreadful year, hopefully, those surprises will be for the better.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and no strategy assures success or protects against loss. Investing involves risk including loss of principal.
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KEVIN GARRETT, AWMA, CFS
Integrated Financial Group
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