This year will be remembered for many firsts in US history. Among the firsts include decisions made by politicians, the fastest economic reversal from best in 40 years to worst in 40 years (exceeding periods during the Great Depression), largest Federal debt stimulus program (second largest now pending in Washington), largest and quickest Federal distribution of funds to small businesses and individuals, fastest rise and decline of unemployment, and first nationwide quarantine of the healthy.
Early reports of wildly speculated and incorrect projections of casualties from Covid-19 caused institutional investors to panic and drove the S&P 500 down 34% in 34 days. By March 23, all indices' YTD returns turn massively negative, wiping out trillions in stock market values (another first).
For strange and unknown reasons, as institutional investors historically do, the relentless media frenzy of anything Coronavirus didn’t deter sellers from becoming aggressive buyers on March 24. It’s not entirely a surprise that some investors would begin bottom fishing at some point of the selloff; the curious aspect is that they never slowed down despite many issues each themselves would in normal times stop rallies in their tracks. Investors continued their buying during summer long riots and violence in many cities around the country, worldwide economic collapse, plummeting interest rates, and currency values, historic low oil prices, manufacturing stoppage, declining consumer confidence, massive unemployment, and the list goes on. Yet here we sit with all indices not only in positive territory but at returns that resembled the previous year’s meteoric rally during a strong and prosperous economy. Through yesterday, the S&P 500 is up 15.62%, S&P 400 (mid-cap) up 11.95%, S&P 600 (small cap) up 10.16% and NASDAQ up a whopping 42.76%. Investors must have thought, “Go big or go home” even if the world was coming to an end as we know it.
This year rewarded momentum investors – those that base decisions on market trends, and devasted fundamental investors – those that base decisions on economic news. For good reasons, fundamentals sold their accounts early this year and stayed in cash, convinced all the bad news would soon reverse the rally. It didn’t, and the market rally never looked back – well, a little pause in October, but nobody noticed.
Warren Buffet is a fundamental based investor and never bought tech stocks at all during the twenty-year tech rally of 1980 – 2000, correctly referring to unrealistic valuations and forecasting a day of reckoning. Momentum investors did not care and earned historical returns, with many companies never earning a profit. Of course, the day or years of reckoning did happen beginning three months after President Bush's inauguration in 2000. However, if momentum investors also sold in early 2000 as market trends reversed, they may have saved their outsized profits or better began shorting the market to profit on the way down.
The challenge with a fundamental investment strategy is that current headlines do not always correlate with stock market trends, even though sometimes news will disrupt a trend for a short period (days or weeks). However, the real problem is the stock market is unpredictable and undefinable. It rallies when all logic points to selling and vice versa. This year being a classic example of absolutely no logic as to why the indices are positive YTD, let alone at all-time highs.
What Does This Mean to Me?
We incorporate momentum strategy along with technical analysis in our portfolio management process. The strategy has served us well for over 20 years to develop a repeatable and definable portfolio management process to navigate through good and bad market cycles. Last year both fundamental and momentum investors had supporting evidence to ride the rally and earned terrific returns. All our model portfolios have terrific returns this year, with the growth style portfolios performing especially well. Imagine the difference this holiday season celebrations (virtually, of course) between the fundamental and momentum investors as one group is still waiting for the market to crash and the other determining what to do with all their profits. We are glad to be in the happy crowd.
This being our last update for 2020 and the last time this year to say how much we appreciate you. It has been a most challenging year to navigate our model portfolios for private investors and retirement plans representing over $170 million and provide insights for each week’s commentary. This is our 20th year of writing Updates, and we have thoroughly enjoyed the opportunity of sharing news, commentary, and occasionally personal reflection. We thank you for taking the time each week to read our UPdates and for the many comments afterward. We pray for you and your family for a healthy holiday season and a prosperous 2021! Talk to you next year.
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