A Look Back
Having been raised by two parents from the Bluegrass state of Kentucky, I developed an appreciation of the beauty and power of horses at a young age. My dad would sometimes take me to the racetrack where the true physicality of these animals was on display. There was a particular announcer who became famous for his call of the races. Whatever the length of the race, as the horses made the final turn and headed home he would call out the above line…"and, down the stretch they come!"
We have heard that horserace analogy quite often over the last several weeks as two vaccines for the coronavirus were making their way into arms, and now a third vaccine from Johnson & Johnson has been approved for use. "We’re coming down the homestretch…if we can just hang on until the large majority of citizens get vaccinated." There can be no question that we are all ready for some sort of return to normalcy…for spring to sprung with warmer weather…traveling to a favorite vacation spot, etc. The list really does go on.
As we get closer on the medical front there is still much uncertainty on where financial markets are heading. The month of February delivered a nice bounce-back for most stock indexes after a slightly negative start in January. Small-Cap stocks continued to do better, outperforming Large-Cap by nearly 3.5%. (6.23% vs. 2.76%) Over the last three months, the gap has widened to almost a 15% difference! International stocks were up as well and have also outpaced the S&P 500 over the same timeframe. We have often written about one of the old-school money management tenants: outperformance eventually leads to underperformance and vice-versa. We are seeing that play out now, as the main drivers for stock market returns over the last several years are struggling on a relative basis.,
Investors are rotating away from some of the popular names like AAPL, Amazon, and others and are rewarding some previous laggards. The real reckoning that many are trying to wrap their minds around is what to do in the fixed-income world. Core bonds were down 1.44% for the month and now 2.02% for the first two months of 2021. Investors enjoyed a 7.5% return last year, which is roughly 2.5% higher than the average over the last 25 years. We have seen intermediate and longer-term rates sneak up over the last couple of months. The 10-year Treasury, for example, has increased from .93% to 1.5% currently. That .6% move might not sound like much on an absolute basis, but is actually quite substantial in the current low-rate environment.
A Look Ahead
When the horses are jockeying for position coming down the stretch, there is much uncertainty about how the race is going to play out once they reach the finish line. Will the leader hang on, or will an unexpected closer rally and steal the win? We exist in the same kind of uncertainty in current markets. We believe that there are enough short-term drivers that should act as a tailwind to sustain current market levels. Fourth quarter earnings for companies in the S&P 500 were good, with nearly 80% beating earnings estimates. Retail sales have shown a strong rebound after a somewhat disappointing holiday season. Perhaps most importantly, the Fed and U.S. government have reaffirmed their commitment to lend their respective helping hands. The Fed does so currently by keeping the Fed Funds rate at zero, and the government has promised another stimulus package of nearly $2 trillion. We certainly have longer-term concerns as valuations remain high and we worry about the increasing level of overall debt incurred. For now, though we ride our horse down the stretch with the finish line in sight...