As we start 2021, the month of January is a month of giving something up for many – also known as resolutions. It might be alcohol or a move to a healthier diet such as the cereal mentioned above.
However, since the end of the first quarter of 2020, economic pundits have been debating which letter best reflects the shape of the economic recovery path from the lows of the March to May period. Would it be a ‘V’, ‘W’, ‘L’ shape or even one that resembles a Nike ‘swoosh’. Having reached the end of 2020, the current favourite letter of the alphabet nominated by those same pundits to depict the shape of the recovery, is ‘K’. A stop/start recovery in effect. While current headlines in the UK are highlighting the new variant of Covid-19 and another lockdown, the good news on vaccines, coupled with loose monetary and fiscal mixes in developed economies, presents optimism for the future beyond the next few months. The difficulty for investors, having enjoyed a much better than expected 2020 outcome, is the assessment of valuations in almost all asset classes.
A Brexit withdrawal agreement was finally agreed on Christmas Eve and signed into law a week later. In Europe, the spread of the new variant of Covid-19 (first discovered in the UK) and political machinations in the US dominated the month’s headlines. The prospect of further fiscal stimulus in the US buoyed American credit and equity prices where the notable inclusion of Tesla in the S&P 500 equity index provided a further boost to Tesla’s stock price. We discussed this in our blog ‘Supercharged’ published on November 17th 2020.
Tesla is something of a Marmite stock, but its inclusion in the S&P 500 index caused some positive disruption to Tesla’s stock price. Having risen 743% in 2020 as a whole, Tesla’s stock price rose 24.3% in December; it’s market capitalisation or value at US$669 billion makes it the sixth most valuable US company. Extraordinary.
Elsewhere, a loose monetary and fiscal policy combination provided a positive backdrop for financial markets, offsetting Covid-19 infection rate increases and political concerns. The last-ditch attempts to find a withdrawal agreement agreeable to both sides and the gradually reducing reluctance of President Trump to acknowledge his defeat to President-elect Joe Biden proved an interesting side-show that continued to the end of the month. The prospect of a further stimulus in the US helped risk-assets end the month positively.
For once, the US equity market was something of a laggard in performance terms with the S&P 500 index rising 1.38% in December whereas the FTSE All World rose 2.2% over the month with the previously under-achieving UK FTSE All Share rising 3.86% aided by a final week that saw the Brexit withdrawal agreement happen. Smaller companies performed well in absolute and relative terms.
The equity rotation in favour of ‘value’ stocks from their ‘growth’ counterparts post the November 9th vaccine announcement fizzled out in December.
The US currency generally drifted lower over the month and sterling gained in the final days of December.
Debt markets edged higher into positive territory with credit spreads ending at historically tight levels. Commodity metals were mixed with gold posting a strong positive month helped by the weaker US dollar.
As 2021 starts, the good news on vaccines and their longer-lasting impact continues to outweigh the negative, and hopefully shorter-term, news on Covid-19 infection rates – the latter largely due to the new variant.
While valuations and the perceived gap between ‘value’ and ‘growth’ stocks continue to vex many market participants, as thematic investors that discussion is largely redundant to us. Concentrating on long-term demand themes is more relevant than attempting to catch the falling knife represented by companies structurally challenged by their industry, dependence on capital/leverage, high trading volumes and thin margins.