2020 was an unusual and volatile one with the S&P 500 Index’s 34% decline in 30 days in March followed by a re-tracement and rise of over 16% by year-end. This proved once again that a longer-term outlook is required in successful equity investing. The Nasdaq Index has risen over 43% with the concentrated leadership of Amazon, Apple, Alphabet, Facebook and Microsoft, which now make up 45% of the index. These five growth stocks had significantly higher returns than the other 495 names in the index. These companies benefitted from the work-from-home trend as well as their increasing dominance in market share and potential new sources of earnings. Recently, the market rally has broadened and more value-oriented companies in the financial, energy, basic material, and industrial sectors are catching up. The growth stocks previously mentioned are becoming larger targets for the Federal Trade Commission and states that may start to serve anti-trust lawsuits; however, this has not affected their stock performance.
The new presidential administration is likely to change U.S. policy toward favoring clean energy, renewing global trade policy, spending more dollars on infrastructure and supporting labor issues. The president-elect’s agenda promotes higher taxes on corporations and individuals to pay for the new programs. We should expect more stringent national pandemic policies to slow the spread of COVID, which may reduce economic growth. As a counterbalance, a new multi-trillion-dollar green energy infrastructure package is likely to be proposed in the first 100 days of the Biden Administration. This will have the effect of another fiscal stimulus package and help equity market valuations rise further. Many of the administration’s agenda items will require the two Georgia senate runoff election wins on Jan. 5.
There is an emerging academic debate about “de-growth,” which favors improving human well-being rather than focusing on the national pursuit of economic growth. The idea is that developed nations would accept zero growth to build an economy that is more fair, healthier, and happier for the human race. Technological improvements have enabled humans to be more productive with less energy and this may enable life expectancy improvements, greater access to healthcare, improving educational attainment, and reducing poverty levels. This debate has emerged in the corporate board rooms as a focus on “ESG” or Environmental, Social, and Governance investments. The fiduciary responsibilities of a corporate board or trustees of a pension plan are to provide return to the shareholders, but this is being re-defined to include “stakeholders,” which is a much broader responsibility. However vague the “ESG” metrics and definitions, we believe that most U.S. companies are focused on responsible promotion of safe, healthy, and responsible long-term growth.
The Federal Reserve has recently promised to continue buying securities to provide market liquidity and suppress interest rates, which will augment the recent fiscal policy stimulus package. The massive bond-buying program has caused the Federal Reserve balance sheet to grow to over $7.2 trillion, which supports higher bond prices and equity market valuations. This isn’t likely to change in 2021, but it does have the effect of lowering the value of the dollar against other currencies. This would support U.S. corporate export growth since U.S. goods will be more competitively priced in other countries.
Our portfolio holdings have benefitted from the growth-oriented focus of the markets. Our diversification of having small cap, mid-cap, and value-oriented holdings should enhance returns in 2021. In 2020, we had the benefit of being over-weighted in the top performing sectors, which were technology, consumer discretionary and communication services. The worst performing sectors were energy, REIT, and financials where deflationary trends and lower corporate profits are expected. Once the massive job of national vaccine distribution occurs, the impact of COVID will recede, corporate earnings will rise, and the economy will normalize. This process may take six to nine months, but it will slowly improve employment and unleash a restrained demand for goods and travel.
|Index||Dec. 31, 2020|
|S&P 500 Index||16.3%|
|S&P Mid-Cap 400 Index||11.8%|
|S&P Small Cap 600 Index||9.5%|
|MSCI All World Cap Index||14.3%|
I wish you the best for the New Year!
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