Turning the Page on 2020 and Looking to 2021
With 2020 in the rearview mirror now may be a good time for reassessing how we got here. We had hoped that so much of the COVID-19 virus drama would begin fading from the forefront at this point. However, this was not to be. The virus has proven more dogged than most of us were expecting and the rollout of the vaccine has been slow, plagued by confusion and delays. Now that 2021 has arrived the US stock market does appear that it too will be at least partially defined by the human response to the virus just as most of 2020 was.
2020 was one of the most tumultuous years of recent memory. Aside from the horrors and tragedies of the COVID-19 virus, the year also featured extreme hardship, tragedy, tension, and divisiveness for much of the nation. That 2020 featured the shortest bear market in history, sandwiched firmly in between two bull markets, is well documented. As are so many of the ingredients for its recipe. Yet amid all of the turmoil Assured Capital Partners strived to remain a source of stability for all clients to depend on. A reliable beacon of light in the fog, shepherding their investments safely through the turbulence. By year’s-end the Balanced Growth Fund LP had another extraordinary year, narrowly missing surpassing a 40% return for the third time in the fund’s existence. According to hedge fund database service EurekaHedge ( https://www.eurekahedge.com/ ), the fund has now returned over 376% since inception as of the end of 2020. So what does the firm see in store for 2021?
There are growing signs that US stock market fundamentals are weakening due to increasingly over-valued equities and the drastically rising number of speculative trades in the options market. Owing at least in-part to the record number of new retail trading accounts in the aftermath of the first and second CARES acts and the $3trillion worth of capital injected into the economy.
The S&P 500’s weight is represented roughly 23% by the big-6. That is a disproportionately higher concentration than ever before. The broader market is far too susceptible to shifts in the big-6 tech stocks, the 5 FAANG stocks (Facebook, Apple, Amazon, Netflix, and Alphabet) and Microsoft. Without these 6 stocks the S&P 500 would have been roughly flat over the last two-plus years. The forward price-earnings ratio for the S&P 500 is hovering around 23. Nearing its highest levels in 21 years.
The overall market caps of all US listed companies is roughly almost double that of the entire US Gross Domestic Product at the moment. From here on out there are probably two possibilities, one is that US GDP will increase to meet the valuations, the other one is valuations will drop to meet the GDP. Legendary investor Warren Buffet looks strongly at market cap vs GDP. Mr. Buffett is on record stating that when looking at a predictable long-term valuation for stock prices, that Market Cap to GDP, “is probably the best single measure of where valuations stand at any given moment." And the original Buffett indicator is Market Value vs Equities Outstanding, for which it measures the ratio of Corporate Equities/GDP. The highest measurement on-record was 1.592, taken on December 31, 1999, a mere three months before the peak of the Dotcom bubble (March 10, 2000 to be exact). At least it was until last year when the measurement reached 1.743 on March 31, 2020. Further increasing to 1.766 during Q3, 2020. Of course, this measurement has the disadvantage of data lag since it is only published quarterly.
The Wilshire 5000 Index to GDP Ratio is likely a more accurate tool for measuring current valuation levels due to its more current data and it being a further broad-based index. The Wilshire 5000 Index is widely accepted as the definitive benchmark for the U.S. equity market and is intended to measure the total market capitalization of most publicly traded companies headquartered in the United States. During the Dotcom bubble of 1999 the Wilshire 5000/GDP Ratio reached a peak of 1.471 on March 23, 2000. This ratio had not been topped until November 25, 2019. Barring the COVID-19-related pullback this past Spring, these elevated levels have continued to ascend steadily ever since. As of mid-January this ratio resides around 1.9 and climbing. That’s approaching levels that are roughly 35% higher than one of the most-infamous stock market bubbles of all-time. Should we as investors panic. Certainly not. Should we be highly concerned? Probably. Should we remain vigilant? Most definitely.
Taking note of all of these potentially negative conditions (there are others-too many to list here) it would be easy to conclude that investment team at Assured Capital Partners have a bearish outlook on 2021. Yet that conclusion could not be further from the truth. Utterly incorrect even. And what is the reason for such contradictory standing? Liquidity. A lot of it. In early 2021 there’s nearly $5 Trillion sitting on the sidelines at the moment. That’s about one-fourth of the total US Gross Domestic Product on an annual basis (2020: $20.8 Trillion). Not to mention the government is considering further injection of cash into the economy via additional rounds of stimulus. And when all of this pent-up capital gets unleashed on the market, and the economy at-large, the upshot will likely be staggering.
Additionally, the Federal Reserve Bank has indicated it intends to maintain a low interest rate policy for the foreseeable future. Presumably keeping bond yields suppressed in the near-term. Forcing more investors to seek positive returns in equities. Also, many companies will see favorable earnings comparisons during much of 2021 relative to last year leading to a large swath of positive earnings beats. And finally, many anticipate there is a level of pent-up demand that will be unleashed in areas like travel, leisure, and retail once mass inoculation is achieved. So while there could be a pullback or two lurking in 2021, and there likely will be, the broader market, in the opinion of our investment team, should finish higher than where it began. The journey to get there, however, may be quite a turbulent pilgrimage that requires masterful navigation.
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