Buy the Dips

December 21, 2020

Market Update, 2020-12-21 . Last week, the S&P 500 closed up 1.3%, with the NASDAQ leading the way, up 3%. Late Friday, news on a positive outcome for US bank stock buybacks in Q1 2021 as well as a $900+ billion Covid Round-2 fiscal deal provides hope for a stronger January ahead.

Congress finally arrived at an agreement on coronavirus relief. On Sunday evening, both sides signed onto a relief package worth $900 billion, which includes stimulus checks ($600 for each American), unemployment benefits ($300/week for 11 weeks, or March 14), relief for airlines; small businesses (funds for forgivable PPP loans) and the arts (theater operators may be eligible for grants); schools (funds for HVAC repair and replacement), and renters (moratorium on evictions will be extended by a month). Federal government funding was given another extension, but only for 24 hours, which should be just enough time to vote on the package.

Markets

With liquidity lower during the shortened holiday week, markets are starting off on a down note as European markets have led markets lower. A new variant of the virus (more contagious) is being reported and, although this news is one week old, London has gone back to lockdown mode. As the holidays begin, a number of countries blocked travel to and from the U.K., including Austria, Belgium, Germany, France, Ireland, Italy and the Netherlands. This of course is bad as businesses were getting ready for the end of the transition period in 11 days and are stockpiling. Brexit uncertainty is not helping either. The overnight reaction seems to be a typical short-term hedge fund overreaction, trying to lock in the year.

2020: What was hot?

The Nasdaq was the big winner, up more than 40% on the year. Heavyweight names in the technology-led index directly or indirectly benefited from the pandemic. The 5-year annualized return is now 19% and the 10-year return is 17%.

IPOs were also hot. Names like Airbnb, DoorDash and Snowflake saw strong opening price action. Despite comparisons to 1999, these businesses have more seasoned businesses to fall back on.

Consumer discretionary stocks also thrived with the pandemic and millennial shift in spending toward durable goods. The sector second YTD in the S&P 500, pushing returns in excess of 30%, more than twice the gain for the broad index. Communications services similarly benefited.

2020: What was not?

Size mattered and smaller was worse off for most of 2020. S&P 100 large caps posted almost twice the gain of S&P 600 small caps.

Banks lagged this year, with direct exposure to the small business and commercial real estate sectors. The group is currently down 21% in the U.S. A steeper yield curve has helped later in the year and could provide further relief in 2021.

Energy, lagging badly since June of 2008, was the biggest drag in 2020, with West Texas Intermediate (WTI) crude oil prices even trading negative at one point. The sector is still down 36% in the U.S. — despite a solid rally in WTI pushing $50 per barrel this week.

Resources

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