January 2021 Insights

A New Year brings New Market Highs Despite a Weakening Economy

  Key Observations:

  • In contrast to weakening economic indicators and continued COVID-19 related lockdowns in much of the US, the stock market continues to rise with broader asset class and sector participation.
  • With Democrats controlling all three branches of government, the market has brushed off worries of higher taxes and increased in regulation with anticipation of more COVID-19 relief packages and broad increases in US government spending. 
  • Spikes in COVID-19 cases have impacted the US economy as the labor market has weakened and likewise consumer and small business sentiment.  

Market Commentary:

Led by technology and consumer cyclicals, growth stocks once again led the way once in 2020.  According to Morningstar, growth stocks increased by 44.7%, far outperforming core and value stocks which returned 18.2% and -1.3% respectively.  The 46% spread of growth over value is the largest since the dotcom bubble of 1999 when the spread was also 46%.  Now before the FOMO trade (fear-of-missing-out) gets the best of us and we pile on growth and technology stocks, let’s take a closer look at how stocks crossed the finish line in 2020 to gauge where momentum is taking us in 2021.   

As noted, technology stocks dominated last year returning 48.0%.  Other growth sectors, namely consumer cyclicals (think Tesla) and communication services gained 49.1% and 26.1% respectively.  Unsurprisingly, the laggards were the value-oriented sectors of financial services (4.0%), real estate (-4.2%) and energy (-33.1%).  However, towards the end of 2020 things started to change.  A confluence of factors including robust technology/growth stock valuations, COVID-19 vaccine deployments and expected federal stimulus packages, propelled a shift to underperforming asset classes and sectors.  Since September 1st of last year, value has outperformed growth by 6.4% with energy and financial services leading the way up 16.1% and 13.3% versus 10.7% for technology stocks.  The broader participation is evident in the performance of small cap stocks.  Lagging large cap by 19.2% for the first 8 months of 2020, since September, small cap has outperformed large cap by a whopping 24.7%. 

For those of you who have chosen a more conservative balanced portfolio with a significant allocation to fixed income, don’t feel left out.  Last year bonds returned 7.5% as measured by the Bloomberg Barclay’s US Aggregate bond Index.  This includes an 11.3% return on investment grade corporate bonds, 7.6% return for intermediate term US Treasuries and an incredible 17.7% on long-term Treasuries.  A balanced portfolio consisting of 50% total US stock market and 50% total US bond market returned over 14% in 2020. 

Economic Commentary:

Needless to say, COVID-19 is driving economic conditions and the recent spike in cases and continued lockdowns have certainly impacted the labor markets.  According to the Bureau of Labor Statistics, December’s nonfarm payrolls declined 140,000, ending a streak of seven consecutive monthly gains.(1)  In the wake of the poor jobs report, the Commerce Department reported December retail sales declined 0.7% and November retail sales were revised down to -1.4%.  The weakening labor market and shaky consumer has certainly spilled over to business sentiment.  The National Federation of Independent Business’s Small Business Optimism Index declined sharply in December from 101.4 to 95.9, its lowest point since May of 2020 and the first time in more than 40 years the Index has dipped below 98 in December.(2)  More alarmingly is nine of the ten index categories declined, led by the 24-point drop, to a net negative 16%, in owners expecting better business conditions over the next six months.   

It is not all bad news.  The Federal Reserve reported industrial production rose 1.6% in December and at an annual rate of 8.4% for the entire fourth quarter.(3)  Impressively this is only 3.3% lower than pre-pandemic levels.  The housing market remains strong, so strong in fact builder confidence declined three points in December to a still robust 83 (any reading above 50 is considered positive).(4)  How does that happen?  National Association of Home Builders Chairman Chuck Fowke said, “Builders are grappling with supply-side constraints related to lumber and other material costs, a lack of affordable lots and labor shortages that delay delivery times and put upward pressure on home prices.”(5)  Sound like too much of a good thing. 

Final Thoughts:

So back to 1999 and the dotcom bubble.  For those invested in diversified portfolios it was difficult to watch technology and other growth stocks generate massive returns.  After all, the tech heavy NASDAQ 100 returned 85.3% in 1998 compared to 14.1% for value stocks.  In 1999 the FOMO trade kicked in as it was all about technology stocks and the NASDAQ 100 gained 101.9% while value stocks declined 1.3%.  What followed was equally amazing.  Over the next three years, the NASDAQ 100 declined 36.8%, 32.6% and 37.5%.  During the same time period value stocks outperformed growth stocks by 38.5%, 25.6% and 19.5%.  In fact, during seven of the next nine years value outperformed growth.  It was not quite as difficult to watch if your diversified portfolio included value stocks. 

Do I expect a repeat performance?  No.  But it is important to remember the importance of diversification because it is extremely difficult to predict when these major shifts in sentiment will occur.  At Concord Asset Management (“CAM”), we believe in extensive diversification and all our client portfolios consist of growth, core and value stocks.  If value stocks begin a period of outperformance over growth, we believe that our clients will capture it.  If technology/growth stocks continue this remarkable run, our clients should capture that as well as all of our clients have exposure to CAM’s disruptive innovation allocation. 

Lastly, given the uncertainty in both the economy and the continuing pandemic, expect the financial markets to be volatile.  Even as much of the recent economic data shows weakness and stock market valuations are high, we cannot ignore the potential impact of the new administration’s $1.9 trillion stimulus proposal.  The potential for massive stimulus, continuing COVID-19 vaccination rollout, very low interest rates and pent-up consumer demand is a backdrop that favors a continued, diversified stock market exposure. 

All performance data generated through Morningstar. 
  1. U.S. Bureau of Labor Statistics: https://www.bls.gov/news.release/empsit.nr0.htm 
  2. National Federation of Independent Business: https://www.nfib.com/content/press-release/economy/small-business-optimism-drops-below-index-average-in-december/ 
  3. Federal Reserve: https://www.federalreserve.gov/releases/g17/current/ 
  4. National Association of Home Builders: https://www.nahb.org/news-and-economics/housing-economics/indices/Housing-Market-Index 
  5. Reuters: https://www.reuters.com/article/us-usa-econonomy-housing/u-s-homebuilders-confidence-slips-in-january-idUSKBN29P1XC 


Note: All performance data in the following two charts were drawn from Morningstar.



Disclaimer: The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All data is as of the end of January 2021 unless otherwise noted. Data sources include: www.morningstar.com. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.


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