MARKET COMMENTARY WINTER 2021 - ONWARD & UPWARD extraordinary 2020 - JFL Group
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MARKET COMMENTARY J o efo rd L ee
CIM , CFP®, FCSI
Portfolio Manager, Investment Advisor
HollisWealth, a division of Industrial
WINTER 2021 Alliance Securities Inc.
Insurance Advisor, Hollis Insurance
ONWARD & UPWARD extraordinary 2020
We entered into the fourth quarter with
heightened trepidation. In typical fashion, October played
out as a volatile month but was followed by a strong
November rally after a muddied US Presidential election
and first COVID19 vaccine by Pfizer/BioNtech approved
for distribution. Although meaningful improvement to
normality is still months away, it was enough for the global
markets to finish on an upswing with a big asterisk on
2020.
The S&P/TSX Composite gained 2.1% in 2020
with most of the recovery coming from a sprint to the
finish line this final quarter. The index popping 8.1% with
the bounce in Energy 40.7% and Financial 16.8% Sectors.
The dividend yields of many financial services companies
and their reasonable forward looking valuations continue
to offer substantial value in a zero rate environment. The
pace of earnings recovery for energy and financials will Perhaps investors’ confidence was strengthened
likely follow the path of past recessions but the successful when a Republican President in the Oval office passed
vaccination of the population will shorten that time. This America’s first Basic Universal Income benefit. Crude
applies to commercial real estate which is too early to call oil prices briefly traded at negative values for the first
with the TSX Capped REIT index falling (13.08%) this time in history. This may also be one of the shortest
year. US Recession on record if the economy can avoid
Commodities as an asset class underperformed another contraction from this more devastating second
equities for the tenth straight year. In a world that has wave of Covid19.
seemingly transformed to a digital life, it has been a lost There was a very significant performance
decade for commodities. Performance of Precious Metals disparity this year based on some interesting data. The
were muted in this final quarter partly due to an improved country with the highest Covid infection and mortality
economic outlook however, it was still golden with bullion cases had one of the strongest stock market returns.
prices up almost 25% this year. While the S&P 500 is up 18%, the average stock in the
It is an understatement to say 2020 is a most index is up just 8%. This means the largest stocks in the
unique year in U.S. financial markets since the 2008 credit index are up a lot more than the smallest stocks. The
crisis. It started with rapid government mandated biggest component of the large cap US index is
shutdowns which triggered the fastest bear market in Technology with 27.7% representation, an increase
history with the Dow Jones Industrials plummeting 30% in from 24.2% just at the beginning of the Pandemic.
just 22 days to end the longest bull market in history. This This may not seem out of line until we think about the
market drop was followed by the fastest bull market in 15 typical retired conservative investor. A diversified
days declared on April 7th after propelling 20% from portfolio with almost 30% of the stock allocation in
March 23rd lows. Technology would be an exception rather than the rule.
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ONWARD and UPWARD MARKET COMMENTARY WINTER 2021
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Value disciplined investors like Warren Buffet and negative-yielding bonds; investors have been forced to
Berkshire Hathaway (BRK.b) missed out on big returns in gorge on risky corporate bonds at record valuations.
this momentum market. Buffet’s BRK.b had only Current US Fed chair Powell is determined to keep
managed a gain of 2.4% in 2020. Similar traditional brick rates on the mat with a single minded focus of
and mortar businesses, stocks with the lowest P/E ratios, economic recovery. Their action of buying up junk
the lowest price to sales ratios, and the highest dividend bonds, Mortgage Backed Securities beyond Treasuries
yields underperformed stocks with the highest valuations will only encourage money flows to stocks and higher
and low or no dividend yields by a wide margin. risk speculation.
Investors with a case of FOMO (fear of missing
out) partied in IPOs like it was 1999. Debuts from big tech
and consumer names like Snowflake Inc., Airbnb Inc. and
DoorDash took this year’s initial public offerings volume to
a record $175 billion. The first-day return for IPOs
averaged 40% this year, the highest ever other than in
1999/2000. Additionally digital currencies were all the rage
with Bitcoin catapulting up 300% in 2020 almost doubling
its value just since mid-December.
Fans of Elon Musk celebrated more than a
successful SpaceX launch, Tesla stock had stratospheric
gains of more than 743% but this comes with trading at a
PE multiple of 1435x compared to 29x for S&P500. At
this level, investors are getting a feel on what a ride to Mars
with Elon is like. People are now buying and selling TSLA
at a higher volume than even the S&P 500 ETF. It is insane
to think that $1.2 Trillion in Tesla stock traded in the final
weeks of the year is more than Facebook traded in all of
2020. Incredible events shaped this year of global mayhem In Global Markets, 4 out of G7 economies ended in
but the best investment strategy this year was to be positive territory. China with the second largest
aggressive and buy the most expensive stocks and ignore economy has the fourth lowest P/E ratio (less
the cheapest stocks that pay a steady dividend. Only time expensive) among this select group of countries but it
will tell but the current market momentum is on the side of also has the highest forecasted GDP growth rate for
the optimists. 2021. Some notable countries with better growth
The market participants have friends in high prospects going forward are Malaysia, Hong Kong,
places. Like the aftermath of the Financial Crisis in 2008, Russia, and Singapore which top the list. The US
stocks got strong support from US government spending meanwhile ranks in the middle of the pack. Canada
and stimulus triggered from the severe economic shock of ranks ninth which expected growth is to be higher than
the pandemic. Central bankers around the world pushed the US. In the US, the Manufacturing and Services
borrowing rates so low that there are $18 trillion of global indices are back to pre-COVID levels.
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ONWARD and UPWARD MARKET COMMENTARY WINTER 2021
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In fact, the US Manufacturing PMI is at its highest Highlights of the Presidencies with full control of government.
Obama's first term
level since September 2014 while the Services sector is at
Democratic majorities in the 111th Congress, 2009-11
its best levels since March 2015. On a global basis, while With strong majorities in both the Senate and House, Congress
Manufacturing has rebounded to its pre-COVID levels, the passed the Affordable Care Act, an aggressive economic stimulus
Services sector has not. package and the Dodd-Frank financial reforms.
You are probably like most people and feel
George W. Bush
enough is enough on US politics. It feels oddly
Republican majorities in the 108th and 109th Congresses, 2003-07
anticlimactic to say we have lived through one of the With narrow Senate majorities, Congress debated and approved
strangest Presidential elections in our lifetime and yet the the invasion of Iraq, passed tax cuts and approved aid in the
market was ‘meh’. The results of the election didn’t please aftermath of Hurricane Katrina.
everyone but the most positive outcome is that it is finally
Clinton's first term
over after years of political theatre. So now, what should
Democratic majorities in the 103rd Congress, 1993-95
we expect for the financial markets with a Democratic With strong majorities in the House and Senate, Congress passed
President controlling both The House of Representatives the Family and Medical Leave Act and transformed trade
and The Senate? relationships through NAFTA and other reforms on tariffs and
Historically, equities have rallied under trade.
Democratic Presidents, and the first year of a President’s
governance have seen a median gain of 9.6% with
positivity about 60% of the time. Since 1928, only Jimmy
Carter in his first term has the distinction of creating
negative S&P500 returns. While Democratic control of
the Senate is feared by market observers, full Democratic
control in Washington DC has typically been accompanied
by positive returns. Under Joe Biden, the Senate is a
virtual deadlock if not for the swing vote going to Vice-
president Elect Kamala Harris. This makes it unlikely for
extreme policy proposals to upset market participants. In
the end, markets care much less on politics than long-term
secular trends. This is just another distraction among all
the others that came before and coming after this new
administration.
Sources: Ycharts.com, theGlobeandMail.com, WSJ.com, Bloomberg, Bespoke Investment Group, Reuters.com, 1832 Asset Management L.P.
Disclaimer:
This information has been prepared by Joeford Lee who is an Investment Advisor for HollisWealth® and does not necessarily reflect the opinion of HollisWealth. The
information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based
on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or
solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open
accounts only in the provinces in which they are registered.
HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory
Organization of Canada.
Insurance products provided through Hollis Insurance.
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