Monthly Video Market Update

Ron Rough, Chief Investment Officer, talks about what investors might expect for the stock market in 2021 and what that could mean for our portfolios.

January Stock Market Update Transcript

Hello. This is Ron Rough with a market update for January of 2021. Happy New Year to everyone. I had hoped for a more normal year at 2021 given all the unusual events of last year. But if the first week is any hint, then we may need to brace ourselves for another crazy year. I will say I’ve been managing money for over 30 years, and I’ve never worked at a year so filled with uncertainty and fear in my life. And that includes 9/11 of 2001, as well as the market crash in 1987. So it was a clearly unprecedented environment for everybody.

So now, where does that leave us as we come into 2021? With the election in Georgia, the Democrats now control both Congress and the White House, and that means that there are some prospects for higher taxes and potentially more regulation. Those two factors could be headwinds for stocks this year. On the other hand, there’s also a greater chance of another stimulus bill coming through, and that would be positive for stocks. In any event, the Fed is promising to keep interest rates as low as possible for as long as possible. So that’s also bullish for stocks.

So what does that mean for investors? Frankly, for the most part, steady as she goes. We tend to view the world using technical analysis so we look at charts and patterns, and at this point, the patterns of most stock indices are quite positive. So our rule is if the trend is your friend and it’s positive, then don’t fight that. And so we’re pretty fully invested and will stay that way until conditions change.

However, there are some issues that we feel could throw a headwind into this year. So we definitely want to be alert for a change. Number one, one of the issues that’s been with the market for a number of years that’s been a concern for us, like you can see in this chart here, the orange chart down below is showing the percent that the top five stocks in the S&P make of the S&P 500 Index. So there’s 500 stocks, and the top five stocks currently represent over 20% of the S&P 500 Index. That’s as high a level as we’ve seen since 2000, right before the tech bubble burst in 1980. That just means that there’s a handful of stocks that are dominating the returns.

And look at this next chart. We have three graphs that represent returns for the year 2020. The top chart shows the performance of these five large stocks – Facebook, Apple, Amazon, Google, and Microsoft – up almost 60% last year. That second graph is the returns for the S&P 500 up around 18%. The chart down below is the performance of the S&P 495 – the other stocks besides those five large – and you can see it was only up 10%. So these small handful of stocks is having a huge impact on the index. That is usually a sign of a market that’s not very healthy. So that’s been a concern for us for a while, and it’s been something we’ve talked about a number of times and these updates are written about, so that is something we want to see. We want to see the market participation broaden out.

Now having said that, I’ll tell you that in the fourth quarter, we did see the rally broaden out. Small cap stocks did really well in the fourth quarter. The average stock outperformed the leaders. So, that was encouraging. We want to see more of that as we come into 2021 in order for us to feel like the environment has really improved and is more healthy. One of the interesting features of last year is that stocks were kind of bifurcated. We had the technology with the so-called work-from-home stocks, mainly technology stocks, but also stocks like Amazon and Etsy, companies that you would still do business with even if you were at home. Those stocks dominated in the first half of the year.

Then we have the so-called recovery stocks. These are stocks that got beat up in the first part of the year but would do well if the economy came around, if the economy began to recover. Think about airline stocks, cruise lines, smaller companies in general, any company more tied to the health of the economy, industrial stocks, for example. And so what you’ve seen since the middle of this year is this back and forth between the work-from-home stocks doing well, these big technology leader stocks, and then the recovery stocks doing well. And at the end of the year, the recovery stocks actually began to outperform.

Now, what does that mean for our portfolios? Well, if you look at the portfolios now, you’ll see a little bit of both. You’ll find in the portfolios we have large cap growth in the portfolios, allocation to these large cap growth funds, maybe technology or internet stocks would be in the portfolio. At the same time, we’ve begun to introduce either small cap funds or other sectors that are more tied to the recovery. So transportation stocks, homebuilder stocks, things like that. So we’re playing this somewhat of a barbell approach so far. At some point this year, it’s possible that ultimately the market will lean one way or the other, and we’ll lean with it.

In addition to that play, we’re also beginning to introduce foreign stocks in the portfolios. We haven’t had foreign stocks in the portfolios in over a year, so this is a first move for us, and again, I think if the recovery continues, we would expect emerging market stocks and overseas stocks to continue to do well. And so you’ll start to see those coming into the portfolios here. In some cases we’ve already started, and that may continue.

So that gives you an idea of the environment and how it’s set up for the beginning of the year. And so that’s all for this update. Until our next update, thank you for watching.


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