by Shawn Narancich, CFA
Executive Vice President of Research
Beneath the Surface
Two weeks into the new year, one might not be surprised to see the market as measured by the S&P 500 Index up less than half a percent. Following an unprecedented 2020, a more pedestrian start to the year – first week up, second week down – is perhaps just what investors need after a 2020 rollercoaster. As the chart below shows, last year’s 18.4 percent total return on the S&P 500 was telling not just for its magnitude, but for how it was achieved.
It demonstrates that 10.7 percentage points of the index’s total return came from just five stocks – Facebook, Alphabet/Google, Amazon, Apple and Microsoft– referenced here as the FAAAM stocks. The remaining ~ 495 names produced a return of less than 8 percent. Led by the technology and communication service giants, last year was a textbook example of a narrow market. Amid the pandemic, investors rewarded those stocks benefitting from the accelerated move to social networking (Facebook), internet search and video (Alphabet/Google), ecommerce (Amazon), wireless communications and cloud computing (Amazon & Microsoft).
Better Days Lie Ahead
With extraordinary amounts of monetary and fiscal stimulus already in place and more on the way, we expect an economy currently in recovery to continue advancing in 2021 as the administration of COVID-19 vaccines reaches critical mass. Life should return to a more familiar cadence, benefitting most those travel and leisure industries acutely impacted by the virus. While the first two vaccines approved for use in the U.S. got off to a slow start amid year-end holidays, the chart below shows that 11 million Americans have now been vaccinated, with the rate of vaccinations accelerating.
Furthermore, the economy is just now beginning to reflect a boost from recently passed stimulus that has injected $129 billion into consumer pockets in just the first two weeks of the new year. Accordingly, first quarter GDP should get off to a fast start; presuming just half of this new stimulus, including extended bonus unemployment benefits, finds its way into the economy, first quarter economic output could surge at a double-digit rate.
Value vs. Growth
With faster growth in the offing and pandemic-disadvantaged industries about to get a new lease on life, investors should not be surprised that the growthy leaders of last year’s market are lagging so far in 2021. Although still early days, large-cap value stocks are off to a relatively strong start this year, up nearly 3 percent, and outperforming their large-cap growth counterparts by nearly four percentage points year-to-date. Benchmark 10-year U.S. Treasury rates have risen above 1 percent, signaling healthier, more broad-based growth in 2021 that has put a nice bid into bank stocks, energy producers and consumer cyclicals.
Our view is that stocks from traditionally early-cycle sectors will continue to do well in a market with broader participation (breadth) post-pandemic. Therefore, we are positioning client portfolios with an above-average weighting of consumer discretionary and industrial stocks, while removing our former underweights to financials and energy. This week’s disappointing retail sales report for December and rising unemployment claims for the past week reflect the still dire state of a COVID-19 pandemic. Being a discounter of future earnings, stocks should be able to clear these near-term hurdles as investors focus on brighter days ahead.
Our Takeaways from the Week
Equities retreated this week as big banks kicked off Q4 reporting season
Value stocks in cyclical industries are off to a strong start in 2021