Top Weekly Themes
- Stock Market Resumes Upward Trend -The S&P 500 registered a loss of -3.29% during the final week of January, which was enough to pull the Index into the red for the month, if only modestly so at -1.01%. Over the first four trading days of February the S&P 500 surged higher and more than recovered all of the losses from the prior week, to finish at an all-time high. Still, as noted, January ended with a loss. While the often-quoted January Barometer, “as goes January so goes the year” is far from foolproof, it does have some predictive ability. Looking back since 1928 and using the S&P 500 as a proxy, when January is positive, the market ends the full year higher 79.3% of the time. When January is negative, the likelihood of ending the year with gains declines to just under 50%. In spite of the historical track record, we remain positive on the equity markets and believe January’s results reflect nothing more than a simple consolidation after a rapid rise in the market. Our stance on equities is supported by the belief that corporate earnings will move sharply higher throughout the year. This leads us to conclude that for 2021 it will actually be January down, full year up.
- Game over? – Last week we discussed the huge run- up in GameStop (ticker GME). Shares in this retailer started the year at $18.84, before rocketing as high as just under $500 toward the end of January. By our math, that high print translated to a year-to-date gain exceeding 2,400%. As widely noted in the media, the stock was propelled by a coordinated effort on social media platforms to squeeze short- sellers. In one notable instance this certainly worked, as the Wall Street Journal reported that the run-up in the shares of certain heavily shorted stocks (including GameStop) translated to a hedge fund posting a loss for January that exceeded 50%. This past week saw a dramatic reversal of fortunes for shares of GameStop. The stock had obviously long since ceased trading on fundamentals and was instead being driven by crowd psychology and groupthink. Starting last Monday, the crowd started to move for the exits en masse. As of last Thursday’s close, GME shares had tumbled by over $270 in February, which translates to a loss of over 83% in less than a week.
- Small Cap Indices see big boost from GameStop in January – The dramatic surge in GameStop shares during January also had a significant impact on the performance of the small-cap benchmarks that held the stock. Within the Russell 2000 Index, GameStop shares accounted for just under 13% of the return posted by the entire Index during the month, with the remaining 1,999 companies accounting for the balance. Looking at the S&P Small Cap Index of 600 stocks, the impact was even more dramatic, as shares in GME accounted for over 25% of the monthly return. Since each Index is market cap-weighted, the outsized impact of GME shares is easily demonstrated when comparing the market cap of the company to start the year ($1.3 Billion) vs. where it ended January ($22.7 Billion). For any small-cap manager that is benchmarked to either Index, the lack of GME shares likely translated to a challenging January, with a more favorable comparison obviously unfolding in February.
|Equities||Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||2.4||3.2||6.9||20.9||75.1||2.18|
|Russell 1000 Growth||2.5||3.9||36.4||84.7||188.9||0.72|
|MSCI EM (Emerging Markets)||2.9||7.6||31.1||22.5||114.8||1.85*|
|Fixed Income||Week||YTD||1-Year||3-Year||5-Year||Div Yield|
|Bloomberg Barclays US Aggregate||(0.4)||(1.0)||4.8||17.9||21.1||1.20|
|Bloomberg Barclays US High Yield – Corporate||0.5||0.9||7.8||20.7||56.1||4.09|
|Bloomberg Barclays Municipal Bond||0.1||0.7||4.2||17.3||20.2||0.95|
|Bloomberg Barclays Global Aggregate x US (Country)||(1.1)||(2.0)||7.3||9.7||20.9||0.77|
|Crude Oil WTI (NYM $/bbl) Continuous||7.4||15.9||13.3||(14.1)||77.3||56.2|
|Natural Gas (NYM $/mmbtu) Continuous||10.2||16.2||56.8||3.1||48.8||2.9|
|Gold NYMEX Near Term ($/ozt)||(2.7)||(5.5)||15.4||34.1||54.5||1,788.9|
|Copper Cash Official LME ($/mt)||0.7||1.2||38.6||10.9||67.2||7,833.5|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.21||1.22||1.10||1.24||1.12||1.20|
|Japanese Yen per U.S. Dollar||104.31||103.25||109.34||110.39||117.14||105.42|
|U.S. Dollar per British Pounds||1.37||1.37||1.30||1.41||1.46||1.37|
Chart of the Week: Earnings Growth Re-rated Upward
Along with interest rates, the other primary driver of stock prices is corporate earnings which, when looking at the S&P 500, took a huge step lower in 2020 as a result of the pandemic.
According to FactSet, the S&P 500 earned $160.49 in 2019, and when final figures are tallied for 2020 the current estimate calls for earnings of $137.39, a 14.4% decline.
As the chart above displays, entering the current year (blue bars), estimates had already called for a full recovery in earnings, with the S&P 500 poised to exceed its pre-pandemic 2019 high of $160.49 in profits.
However, with just one full month in the books, that figure has already been re-rated higher (red bars), not only for 2021, but also for calendar 2022.
If current estimates prove accurate, earnings for calendar 2021 will leap higher by 24.9%, admittedly off a very depressed base. More noteworthy in our opinion, is the 15.7% increase in estimated profits called for in 2022.
Stock valuations, as measured by P/E ratios using current year earnings, are certainly not inexpensive by historical standards, but become more reasonably valued when looking out to next year.
Commodity Prices Trending Broadly Higher
The CRB (Commodity Research Bureau) All Commodity Index is an Index that includes nineteen commodities, with allocations in energy, agriculture, precious metals, and industrial metals.
As the chart above displays, this Index has advanced over 30% since its steep sell-off during the depths of the COVID-19 induced lockdowns.
More significant is the fact that it is now more than 15% higher than it was at the outset of 2020. In fact, this Index now stands at a six-year high. While the broader economy has a long way to go until it fully recovers, commodity prices have already done so.
Although commodity prices arguably matter less in a service-oriented economy like the United States, they still carry a good deal of weight, with roughly 20% of consumer spending (two-thirds of the U.S. economy) directly tied to commodity prices.
This move in commodity prices signals increased demand coming from industrial activity and is broadly supportive of our overweight position in cyclicals. Case in point is the materials sector, which has seen a strong advance of late and has recently started to outperform the broader Index.
Lastly, were prices to continue to trend higher over the coming months, we would not be surprised to see an inflation scare, which could at least test the Fed’s resolve with respect to their stated position to hold the Fed Funds rate at zero until at least the end of 2023.