Happy Twenty Twenty-One

361 Capital Market Commentary | January 4th, 2021

There were more cars on the road and in the parking garage today. I even had a person join me in the elevator! I can’t even remember the last time I rode the elevator with another human being. Hopefully, she enjoyed my humming of the Bee-Gees, but I’m guessing that I had better put a volume filter on that in the future.

The markets ended 2020 with a great December. Probably better than expected as the news was decent and optimistic; we were happily enjoying our holiday time off, and few wanted to sell anything and take a tax gain before year end. For the year, U.S. equities put in another double-digit percentage gain, which was fantastic given the 30% drawdown experienced in March.

So now we reset the yearly returns to zero and look forward to what 2021 has in store. Little has changed in the last two weeks with respect to the COVID virus tug of war. On one side, virus cases are moving higher due to holiday traveling and gatherings. This was expected, and the increased shutdowns and lockdowns for January should tamp down new cases in a couple of weeks. More importantly, three vaccines have now entered broad circulation and are making it into arms. Some stumbles in December, but in the U.S., we should expect the doors to the freezers to be blown open soon and 500K to 1M people getting injected daily. The CDC should borrow Starbucks for a week and jab everyone walking in for their pickup order. In six months, we will all forget about this slow early rollout.

A new surprise to our thinking about the markets has been the weekend political news. Few of us wanted to think about another election night on the calendar, but it now looks like we will need to keep an eye on CNN this week. With both Georgia Senate races tightening so much in the last 24 hours, there is a small chance that the Democrats could tie it up in the Senate. While a tie would not give the Dems a major mandate to increase fiscal spending, it would cause some strings to be pulled, starting with the $2,000 per person increased COVID aid that President Trump and the Democrats asked Congress for. If the markets surged on the hope of fiscal spending gridlock in November, how will they perform if a petite bleu wave shows up in Washington on Thursday?

While I am watching the news out of Georgia and kicking myself for cutting my precious metals positioning, I think that the rest of my portfolio is on track. I continue to want to harvest gains in the growth and technology sides of my equity book as targets are reached, or position sizes grow too large. I want to increase my exposure to cyclical companies that I think are undervalued and will have operating leverage if we have a roaring recovery through COVID. I will also prefer to increase my non-dollar exposures either through foreign stocks or those U.S. companies with rising overseas revenues that are rebounding more quickly. For income, I will tend to avoid liquid bonds and treasuries and instead look to my dividend-paying stocks, preferred stocks, or private debt. With the exception of giving the strong arm to pure fixed income, I want to stay diversified across the risk spectrum and have stacks of chips in many different industries and geographies. There will be opportunities to re-stack the chips high on certain squares in the future, just like there was during 2020. But the market has recovered sharply, so let’s see what the next great set up might be. Hopefully, it will be one surrounding the quicker end of COVID, an accelerating economy, and more people in elevators.

Also, I will be hosting a webcast reviewing 2020 and providing an outlook into 2021 on January 13. Register Now.

Another double-digit year in the books for U.S. equities…

The Dow Jones Industrial Average

Looking at asset returns more broadly…

Gains found most everywhere in equities and fixed income. Weakness concentrated in energy or real estate exposures as COVID uncertainty weighed heavily on the economic outlook. These may likely be the best areas to look for gains in 2021.

Asset Class Returns

As this chart shows, rebounding markets tend to have momentum…

New Bull Markets Historically Built on Strong First-Year Gains

And even strong end-of-year gains tend to have momentum…

A Big End of Year Rally is Bullish

But let’s not forget the single most important asset of most Americans…

For many, the primary residence is the major value creator, and for 2021 through October, the year-over-year price gain is now nearing 8%. Tough to point to a reason that the gains should slow given the record low inventory situation that currently exists.

S&P CoreLogic Case-Shiller 20-City Composite Home Price Index

“Georgia on My Mind”…

President Trump’s weekend calls to various Secretaries of States has made for a tighter Georgia election than expected. If the Democrats win both Senate seats, the markets could view a small blue wave as a risk to higher fiscal spending, interest rates and inflationary pressures. While a Democratic sweep could make some significant changes in D.C., I do not think that a 50/50 split in the Senate is enough of a legislative mandate to cause a tidal wave of increased spending. But, the markets could be on edge until the final results are decided.

Tweet from @biancoresearch
Which party will control the Senate after 2020 election

Air travel did register another pickup over the holidays…

Tweet from @JavierBlas

And the U.S. economy continues to show signs of rebound…

@IHSMarkitPMI: U.S. Manufacturing PMI posted 57.1 in December (Nov: 56.7) to signal the steepest improvement in the health of the sector since September 2014. Expansions in output and new orders remained marked, despite easing. Read more: http://ihsmark.it/nE2q50CZmL8

U.S. Manufacturing PMI

Ditto for the global economies…

Tweet from @RenMacLLC

Just look at Korean exports, which are on fire led by semis and technology…

December exports
(Goldman Sachs)

Korean technology sales now lifting their stock market to a decade-long breakout…

iShares MSCI South Korea Index Fund ETF

Global economic growth leading to increased trade and soaring shipping rates…

@RBAdvisors: #Inflation isn’t dead. The #USD is weakening, the #trade gap is bulging, and shipping rates are rising substantially.
(Chart: @WSJ)

High Seas

One of the biggest commodities floating across the oceans is soybeans…

Tweet from @kannbwx

But all commodities are now benefiting…

CRB Raw Industrial Spot up 25% since April.

It is made up of largely non-fut traded commods, so should not be subject to speculative money flows

Hides, tallow, copper scrap, lead scrap, steel scrap, zinc, tin, burlap, cotton, print cloth, wool tops, rosin, and rubber.

The CRB Raw Industrial Spot Index

As our economic recovery lags, so does the U.S. dollar…

Bloomberg Dollar Spot Index

There is a reason that investors are increasingly turning toward EM exposures…

Tweet from @lisaabramowicz1

This time is not different…

John Rodgers and Mellody Hobson draw a line in the sand and make the case for value.

In the 10 years ended Sept. 30, 2020, the S&P 500 averaged a 13.74% gain annually compared with 9.85% for the Russell 2000 index and 7.09% for the Russell 2000 Value index. And yet, according to Ibbotson’s 2020 SBBI Yearbook, one dollar invested in small value stocks at the end of 1926 grew to approximately $290,000 by the end of 2019. Alternatively, one dollar invested in large value, small growth or large growth stocks at the end of 1926 grew to approximately $35,000, $6,000, and $3,000, respectively, by the end of 2019.

But where others see pain, we see gains. An amalgamation of powerfully one-sided influences and outcomes is telegraphing the future. What worked over the past decade is unlikely to work over the next. With so many anchored to the here and now, the opportunity to profit from today’s orphaned value stocks is great. In 14 of the last 14 economic recoveries, value led the way, across all sectors. Moreover, value has performed well in periods when profits and interest rates are both accelerating. Meanwhile, overly pessimistic views for value versus rosy expectations for growth make for easier comparisons.

Ten years from now, we posit, value shares will have trounced growth, and smaller companies will outperform their larger-cap brethren, as the global economy recovers, demand grows, interest rates rise and at the very least, we experience a healthy dose of mean regression. Now is the time to buy value. And keep in mind, when the tables turn, collateral damage is inevitable. There are times when great companies aren’t great stocks. This is one of them.


My favorites of Byron Wien’s surprises for 2021…

The economy develops momentum on its own because of pent-up demand, and depressed hospitality and airline stocks become strong performers. Fiscal and monetary policy remain historically accommodative. Nominal economic growth for the full year exceeds 6% and the unemployment rate falls to 5%. We begin the longest economic cycle in history, surpassing the cycle that lasted from 2010 to 2020.

Even as energy company executives cut estimates for long-term growth, near-term opportunities are increasing. The return to “normal” increases both industrial activity and mobility, and the price of West Texas Intermediate oil rises to $65/bbl. Rig counts increase and energy high yield bonds rally soundly. Energy stocks are among the best performers in 2021.

The equity market broadens out. Stocks beyond health care and technology participate in the rise in prices. “Risk on” is not without risk and the market corrects almost 20% in the first half, but the S&P 500 trades at 4,500 later in the year. Cyclicals lead defensives, small caps beat large caps and the “K” shaped equity market recovery unwinds. Big cap tech is the source of liquidity, and the stocks are laggards for the year.


Always interesting to look at where Henry McVey is looking for opportunities in the markets…

I would agree that the outlook for Treasuries and fixed income will be limited, while better opportunities for long-term investing will be available in small caps, emerging markets and in the less liquid private asset markets.

We Generally Look for Lower Returns Across Many of the Asset Classes We Forecast

Kara Swisher sees many acquisitions in 2021…

You have to agree that big companies with strong balance sheets will use the pandemic downtick to pick up some top assets to help them grow faster. We are seeing this in the airline industry as Southwest launches new routes and cities and Ryanair buys new planes. Expect a ton of M&A this year.

Instead, there will be a lot of acquisitions. Big companies will swoop in, post-pandemic, to scoop up all the juicy bits. Because of increasing scrutiny from regulators, though, we will not see many megadeals, but rather smaller ones in arenas that are more competitive, such as in autonomous vehicles, health care, fintech and media. The maxim for midsize companies is clear: Get big or get bought.

And for the big companies, the mantra is just: Buy. The Amazon acquisition this week of the podcast maker Wondery, in a deal valued at $300 million — whatever that means — was exactly the kind of thing we will see more of. Amazon is aiming its considerable heft and pocketbook directly at a nascent podcast market. This will result in an inevitable smackdown with Spotify, which has been playing the most aggressively in this space, and we’ll see Apple wade in too along with traditional media companies.


Maybe I am just too hopeful, but count me in on the Roaring 20’s potential…

While many people have lost their jobs, more have kept theirs, and have been unable to spend as much as they used to, with shops and restaurants closed and entertainment and holidays cancelled. The flip side of the unplanned rise in household savings is a frustrated desire to spend. With the end of the pandemic, much of this pent-up demand will be released. Moreover, the policy support for strong demand growth — government deficits and ultra-loose monetary policy — is likely to stay in place for some time.

This is not just a quantitative matter of activity rebooting and purchases picking up. What people will spend money on, too, is likely to carry echoes of the Roaring Twenties.

Public health restrictions have disproportionately hit the more hedonistic end of the consumption spectrum: what we have stopped doing is eating together, drinking together, entertaining one another and going on holiday together. Vaccine-induced herd immunity will, quite literally, make it OK to party again.

And my goodness will we have reason to party. It is not just the numbers that point to a consumer boom; behind them lies something less tangible but yet more convincing. You do not have to be an economist, only human, to understand the desire to let loose, get together, and take risks after a year of cautiously locking down at home and distancing ourselves from one another.

Such upbeat confidence is the most elusive ingredient of economic growth, but it is no less fundamental for that. The belief in good times can spur consumers to make bigger purchases, businesses to invest in greater capacity, workers to train for better jobs — and even families to have more children. All these would contribute to a durable pick-up in growth.


You are not the only one making dream vacation plans for 2021…

Jocelyn Kung hasn’t gotten the Covid-19 vaccine yet, but she already is planning for a grand getaway once she does.

The 62-year-old executive coach from San Francisco says she is splurging on a three-week, seven-stop “transformational experience” in Vietnam in September, complete with a private seaplane, a vintage motorcycle and a blessing by a Buddhist monk.

“It really has kind of given us a little hopefulness,” she says. “The vaccine was the stimulus.”

Coronavirus cabin fever, coupled with a burst of optimism over the vaccine, is sparking some big-trip dreams for 2021. High-end travelers are laying plans for bucket-list journeys to make up for lost time, injecting some light into a still-grim pandemic winter.

“Everybody is excited to get the hell out of their house,” says Ed Leinss, 79, who is planning a monthlong, three-continent journey with his wife this summer, by which time he hopes to be vaccinated. “You get to a certain age, and you don’t have as many years ahead of you as you had behind you.”


If you are a fan of modern music, then you can’t miss this HBO documentary…

The Bee Gees: How Can You Mend a Broken Heart

Catch up on past Weekly Research Briefings >