Sunday, January 31, 2021

Retail Traders Inflict Pain On Some Hedge Funds

Last week investors were reintroduced to the terminology of  'short squeeze' and 'gamma squeeze'. It has been some time since the phrase gamma squeeze was bantered about as much as it was last week as the volatility in a few stocks captured headlines. Stocks like GameStop (GME) and the movie chain AMC Holdings (AMC) saw their stock prices swing widely, but mostly to the upside. So what is going on with a few stocks like this.

Saturday, January 30, 2021

Dividend Aristocrat Changes For 2021

S&P Dow Jones Indices announced the results of its annual rebalancing of the S&P 500 Dividend Index. Three companies are being added in this rebalancing and three are being removed, leaving the number of Dividend Aristocrats at 65. The changes go into effect prior to the market open on February 1, 2021. As noted by S&P, "S&P 500® Dividend Aristocrats® measure the performance of S&P 500® companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company." In addition to the dividend increase requirement, other factors S&P Dow Jones Indices includes in the methodology to select the dividend aristocrats are:

Saturday, January 23, 2021

Foundation For Slower Economic Growth Being Laid, Stocks Still Work

In our Winter 2020 Investor Letter released earlier this month, our firm indicated our real GDP growth expectation for this year is in the mid single digit percentage range. We continue to hold that view given likely pent-up demand and our expectation the economy is exciting the recession. The uncertainty around the virus spread and vaccination progress is a headwind to our growth expectation though. Additionally, before the inauguration of President Biden on January 20, I highlighted the potential risk of a policy error to the economic recovery. Some of the executive orders (EO) signed by the President after he was sworn into office on January 20 now heighten this risk in my view. For investors it is important to separate their political/policy concerns with the view of the performance of the investment markets.

Wednesday, January 20, 2021

Maybe Time To Include Dividend Growth Equities To One's Portfolio

The broadening in performance across multiple equity asset classes is providing investors with investment opportunities outside of the S&P 500 Index. The S&P 500 Index has certainly been a stalwart in terms of performance over the last five and ten years. Given the strength in the equity market and the index trading at valuation levels that some call stretched, investors might consider dividend paying stocks for a portion of their portfolio. One characteristic of dividend payers is they generally hold up better in down equity markets.

Sunday, January 17, 2021

A Policy Error Could Trip Up Stocks

Broadly investors have enjoyed strong returns in stocks over the past two years, the S&P 500 Index returned 31.5% in 2019 and 18.4% in 2020. Last year's return occurred in an environment where earnings for S&P 500 companies is expected to equal $133, down from $157 in 2019. This move higher in stocks at the same time earnings declined has pushed large company stock valuations to levels where one might say they are priced for perfection. One way to look at stock valuations is reviewing a measure called the Rule of 20 which states that stocks are fairly valued when the inflation rate plus the price earnings ratio of the S&P 500 Index equals 20. As the below chart shows this measure currently equals 23.4. If one uses the P/E based on the index's 2022 earnings, the measure equals approximately 20.4.

Tuesday, January 12, 2021

Small Business Optimism Turns Decidedly Negative

The NFIB Small Business Optimism Index turned decidedly negative in December. The index fell 5.5 points to 95.9 and is below the index's long run average of 98. NFIB reported 9 of the 10 index components declined. The survey report notes, "The drop in small business optimism was historically very large...Most of the decline was a result of substantial weakness in the outlook for sales and business conditions in 2021 which brings new Covid threats and the uncertainty about economic policy with a new administration in Washington." Small business owners excepting better business conditions over the next six months came in at minus 16, a 24 point decline from the month earlier and the second largest drop since 1986.

Saturday, January 09, 2021

Broadening Participation In Equity Market Asset Classes

One favorable aspect of the recent equity market performance is the broadening participation of asset classes other than the large cap FANGMA stocks, Facebook (FB), Amazon (AMZN), Netflix (NFLX), Google (GOOGL), Microsoft (MSFT) and Apple (AAPL). As the below chart shows, during the first eight months of 2020, the average return of this basket of stocks significantly outpaced the other asset classes shown on the chart.

Thursday, January 07, 2021

Winter 2020 Investor Letter: From Pandemic To Transition

The just completed year of 2020 saw the S&P 500 Index increase a strong 18.4% and this is on the back of a 31.5% return in 2019. One might not have expected this with a large number of state economies constrained by virus mandated restrictions early in the year. For the five calendar years from 1995-1999 the S&P 500 Index returned 20%-34% in each year. Could the market be in for a repeat of that type of performance? The so-called roaring 1920’s occurred after the Spanish flu of 1918/1919; partially a result of satisfying pent-up demand.

Our Investor Letter touches on some of these topics and our viewpoint on the year ahead.