Summary:
- Global stocks built on November’s gains notwithstanding lackluster economic news
- Two large IPOs reflect the extent of FOMO (Fear of Missing Out)
- Positives: The coronavirus vaccine rollout, U.S. stimulus bill finally passed and Great Britain reached Brexit deal
Commentary:
In December 2020, the S&P 500 Index was up +3.7%[i] while the international stocks, as measured by the MSCI EAFE Index Net, gained +4.6%. Emerging Market stocks (MSCI EM) returned +7.2%[ii]. Certain areas of the market continued November’s large gains. Small-cap stocks, represented by the Russell 2000 Index were up +8.7%[iii]. Crude oil added +7.0% to the prior month’s +26.7% gain and Gold was up +6.6%[iv].
As equity valuations continued to trade near all-time highs, U.S. economic data continues to be lackluster. The BLS November Employment Situation Summary showed a gain of only +245,000 jobs versus analysts estimated +440,000[v]. Retail sales for the month of November were down -1.1%[vi].
“Fear Of Missing Out (FOMO)” was exemplified this past month in two red hot IPOs. DoorDash gained +86% and AirBNB’s shares soared +113% on their first day of trading. There was such frenetic buying of Airbnb shares that investors mistakenly clamored to buy call options on ABB, a large European industrial company.[vii] This type of speculative activity continues in the equity markets as the Federal Reserve continues to create more liquidity. Federal Reserve Chairman Jerome Powell said, “Our guidance is outcome-based and is tied to progress toward reaching our employment and inflation goals. Thus, if progress toward our goals were to slow, the guidance would convey our intention to increase policy accommodation through a lower expected path of the federal funds rate, and a higher expected path of the balance sheet.”[viii] Investors seem to believe that the Federal Reserve will come to the rescue and provide even more liquidity if the economy slows.
Several positive events transpired regarding Covid-19. Mid-month, the Pfizer vaccine was rolled out in the United States and United Kingdom. President Trump signed a $900 billion stimulus bill to aid struggling Americans[ix]. Also on a positive note, Great Britain reached a Brexit deal with the European Union on Christmas Eve[x]. Negative events in December included Facebook being sued by the Federal Trade Commision and 48 states[xi] and Apple announcing that it was closing all of its California stores due to the rampant spread of the virus. On January 4, Prime Minister Boris Johnson announced a countrywide lockdown in the UK effective through mid-February as a mutated strain of Covid-19 hit the country hard[xii]. It remains to be seen how hard this latest shutdown action will effect the European economy.
As we start the new year, we remain focused on the big picture. The U.S. stock market continues to be overvalued and equal to over 187% of the country’s GDP[xiii]. Beyond valuation, we keep on being concerned that the markets appear to be divorced from socioeconomic reality. On Wednesday, January 6, the Dow Jones Industrial Average finished at a record high and the Russell 2000 Index was up almost 4% despite the U.S. Capital being breached and the national guard being called out.
Consequently, we continue to apply diversification and vigulent risk management in client portfolios. We endeavor to reach a balance between offense and defense positions to take just enough risk to generate attractive returns to meet client financial goals in these very uncertain times. On Christmas Eve, we added an equity holding to growth and balanced portfolios that may benefit from people working and shopping from home.
We bid the year 2020 adieu and are hopeful as we enter 2021 that vaccines prove to be effective combating the pandemic and the global economy continues to recover. We look forward to taking advantage of positive developments as 2021 progresses.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] https://finance.yahoo.com/
[ii] https://www.msci.com/end-of-day-data-search
[iii] https://www.ftserussell.com
[iv] https://finance.yahoo.com/
[v] https://www.bls.gov/news.release/empsit.nr0.htm
[vi] https://www.census.gov/retail/marts/www/marts_current.pdf
[vii] Barron’s “From Airbnb to Tesla, It’s Starting to Feel Like 1999 All Over Again. It May End the Same Way.” 12/11/2020
[viii] https://www.cnbc.com/2020/12/16/fed-meeting-live-updates-watch-jerome-powell-speech.html
[ix] https://www.washingtonpost.com/us-policy/2020/12/27/trump-stimulus-shutdown-congress/
[x] https://fortune.com/2020/12/24/after-years-of-negotiations-the-u-k-has-finally-reached-a-christmas-eve-trade-deal-with-the-eu/
[xi] https://www.ftc.gov/news-events/press-releases/2020/12/ftc-sues-facebook-illegal-monopolization
[xii] https://www.cnn.com/2021/01/04/uk/uk-lockdown-covid-19-boris-johnson-intl/index.html
