2021 1st Quarter Investment Bulletin
The stock and bond markets in 2020 were crazy just like everything else about 2020! The journey to a significantly positive year for the Wilshire 5000 Total Stock Market was nothing short of remarkable. The wild ride occurred primarily in three extreme phases.
Phase 1: Extreme Losses
Following a 4.5% gain during the first month and a half of 2020, the stock market plunged more than 30% between February 19th and March 23rd. The year-to-date decline for the Wilshire 5000 on March 23rd was -31%.
Phase 2: Rapid Recovery begins March 24th
Just as suddenly and forcefully as losses began mounting in February, the stock market jumped higher by 9% on Tuesday, March 24th, and continued higher for 5 months. Between March 24th and August 31st, the Wilshire 5000 increased an incredible 45%! The 5-month rise brought the year-to-date gain for the Wilshire 5000 on August 31st to a positive 9.33%.
Phase 3: Some losses, Political Uncertainty, and Rising Stocks
The stock market began a slight cooling off period in early September and declined approximately 6% leading up to November 1st. On November 1st, the Wilshire 5000 after all the gains and losses during the previous 10 months had a year-to-date return of only 3.15%. With two months remaining in the year and a contentious election just a couple of days away, a resurgence in Coronavirus cases, hospitalizations, and deaths a sustained rally in stocks did not seem probable. However, in the face of those external factors, as well as an economy and earnings picture that has remained dreary, the Wilshire 5000 rallied 17% to finish the year with a gain of 20.83%.
Healing Economy in 2021
The key to healing our economy will be the continued rollout of the coronavirus vaccination. The sooner the vaccine is disseminated throughout the population, the more reason for optimism regarding the economy.
Regardless of personal politics, the new Biden administration with the help of a Democratic controlled Congress is likely to pass legislation that will provide additional fiscal stimulus.
The potential for increases to tax rates, especially corporate tax rates, could be a bit of a headwind. However, the administration may be reluctant to make too many changes while the small-business economy is still recovering.
Where is the opportunity in stocks?
We believe stock prices increase over time primarily because of earnings growth. Growth stocks have the earnings, and investors have noticed by bidding their share prices higher and higher. The result is that investors are paying high prices relative to earnings. That is expressed in historically high price to earnings ratios for many growth companies. For example, the overall market has a price to earnings ratio of 22 compared to a 5-year average of 17, and a 10-year average of 15. The Russell 1000 Growth index has a price to earnings ratio of 33.
Morningstar produces a rating for each stock by analyzing a company’s earnings and current price. The result is a rating based on the underlying opportunity for investors, with 5 stars indicating the most upside for investors. As you can see from the illustration below, Morningstar believes that the stocks that offer the most opportunity are in the Value category. More than 2/3 of the individual stocks rated 4 or 5 stars fall into either the Large-Cap Value, Mid-Cap Value, or Small-Cap Value categories. We at Compass agree with that analysis, and in our latest rebalancing efforts have more aggressively added to those categories on your behalf.
