Market Update December 2020 – Will the Value of Value become of Value???
The long-standing axiom that “markets lead the economy” sums up the unprecedented rebound in 2020. Or at least the markets think so. In the midst of health concerns, economic uncertainty, political turmoil (oh, and Brexit is back in the headlines), equity markets continue to march forward, or at a minimum, hold their ground. Has anyone told them how much disruption and risk is out there?
But history suggests that this type of investment climate can be an opportunity. A quick status check of the headline concerns reveals legitimate uncertainty, yet each topic offers a view to an encouraging outcome.
- COVID: The current surge is taking its toll, causing challenges for many businesses (especially small businesses) as they modify or pause their activities. There will be a cost to pay. Yet, ongoing approvals of vaccines are shifting the hope of global vaccinations from “if” towards “when”. A brighter day can be imagined should the likelihood of vaccinations continue to pick-up momentum and support a reinvigorating economy.
- 2020 Elections: The memorable (whether we want it to be or not) elections of 2020 are now behind us, although the results continue to face challenges. Regardless of preferred ideology, the path to finality does appear to be improving, and looks likely to include a split Congress, which has generally been a positive for capital markets as it tends to moderate the magnitude of change. This would be a much smoother path for businesses and investors to adapt to, with the economy less likely to spring a dramatic surprise upon investors. It would also be expected that sentiment would get a lift once the election turmoil is truly behind us.
- Fiscal Policy: Fiscal policymakers continue to bargain for the next stimulus package to bridge the gap between today’s hope for a return to economic stability and its arrival. Expectations are growing for a much-improved situation by mid-2021. But the impact of the recent COVID flare-up has raised the stakes for additional policy measures. Inch-by-inch the two sides look to be nearing an agreement.
While there are certainly other issues to consider (e.g., government deficits, global trade, etc.), these three topics continue to take center stage. Yet, with fiscal authorities supporting the availability of capital (liquidity) and more signs continuing to point towards global economic improvement in 2021, it would not be surprising to see markets move sooner than later in anticipation of a brighter 2021.
Plus, saying good-bye soon to 2020 should lift spirits on its own!
CHART OF INTEREST – Will the Value of Value become of Value???
Broad market indexes often oversimplify actual events and through November 30, they suggest a strong comeback for the markets following the March selloff. But under the hood, the range of outcomes paint a more diverse picture. Through November, 191 stocks in the S&P 500 Index have outperformed the broad index return, while the remaining 300+ stocks have underperformed. And the contribution of just 24 stocks accounted for the index’s gains, while the contribution of the remaining stocks netted out to zero.
This narrow market leadership is indicative of investors’ having preferred large companies with perceived “immunity” to the challenges posed by the pandemic, resulting in large premiums (e.g., high price-to-earnings ratios) being paid for their ownership.
But this also presents an opportunity. If few stocks have fully participated in the advance, what might cause a rotation towards those priced with lower premiums? Two dimensions are regularly used today to describe these opportunities: value and/or cyclicals. In each case, the businesses in these categories are more sensitive to the economic climate than growth stocks and are also available at lower premiums. And therein lies the opportunity. If investors perceive an economic catalyst, it follows that companies with lower premiums would become more attractive candidates for investment. Rather than try to predict this type of shift, what does the market tell us today? The ratio charts below compare Growth versus Value and the Technology sector (a “COVID winner”) versus the Industrials sector (cyclical businesses) using a 20-day moving average as a proxy for the trend. In each case, the trend appears to be rolling over, shifting towards favoring Value and Industrials. Will this trend strengthen? It certainly bears watching as one sign of improving investor optimism for 2021 and a potential shift within market leadership.
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The S&P 500 Index is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the New York Stock Exchange or the NASDAQ Stock Market.
S&P 500 Growth Index: The index measures growth stocks using three factors: sales growth, the ratio of earnings change to price, and momentum. S&P Style Indices divide the complete market capitalization of each parent index into growth and value segments. Constituents are drawn from the S&P 500®.
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The S&P 500 Information Technology Index comprises those companies included in the S&P 500 Index that are classified as members of the GICS information technology sector.
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