Hello again! I’m Johann Komander, Greenwood Gearhart’s Managing Director of Investments, and welcome back for our Monthly Market Moment for February. Despite some recent volatility, markets are back at all-time highs, as the rollout of COVID vaccines and continuation of the economic recovery gives investors optimism for 2021.
Despite last year’s shutdowns and record contraction of GDP, the US economy ended 2020 having contracted by just 3.5%, with growth in the 4th quarter back on track for a 4% annual pace. While still a historic low not seen since wind down of WWII, it nevertheless represents a drastically better outcome than what was feared just 6 months ago, when US GDP dropped at a 33% rate in the 2nd quarter. While the government’s unprecedent stimulus measures set the stage for this recovery, it has largely been the resilience of corporate profits that has sustained the market enthusiasm. An incredible 80% of companies in the S&P 500 beat Wall St earnings estimates in the 4th quarter, with the average earnings per share now higher year over year. While certain sectors like travel and energy certainly remain subdued, companies in most sectors were able to successfully navigate the year through a combination of cost cuts and productivity enhancements enabled by technology.
Despite these strong numbers, a majority of these stocks actually declined after releasing their results. Even more interesting, stocks that missed their estimates declined by less than they normally do. To us, this is evidence that the market had largely already anticipated these results and are already looking past this period of adjustment to the accelerated world we find ourselves in. Indeed, comparing relative performance between sectors lately, it’s become quite clear that markets are now valuing stocks primarily on the basis of their strategic opportunity going forward, a landscape shaped not just by competitive forces and technology but also government and economic policy. Shifts we made last year into areas such as cloud computing and clean energy have proved valuable, as well as buying at attractive prices cyclicals like banks who stand to benefit strongly from the recovery. We believe this combination of investing for both short and long-term trends will remain key to creating value in the coming years.
Despite these sources of optimism, we aren’t out of the woods yet, and hiccups from vaccine distribution as well as new variants of COVID remain as potential sources of volatility. Employment in the US has also started to plateau, which presents risks both in terms of slowing the economic rebound but also in terms of the fiscal and monetary response to it. With markets already pumped with historic liquidity, there is a fine line to be walked with each incremental action. And this debate is currently playing out in Washington as the President and his cabinet advocates for another round of stimulus. We’ve also seen a rise in speculation in certain pockets of the market, as evidenced by recent short squeezes fueled by online forums as well as indiscriminate buying of assetless acquisition companies. So far at least however, these risk factors remain contained, with the market fundamentals intact and the economy likely to continue its significant rebound, particularly in the services part of the economy which has borne the brunt of the restrictions. As a result, we remain cautiously optimistic on the market this year and will continue to monitor new developments and react accordingly as we believe prudent. We will be releasing a white paper in the coming weeks further discussing some of these topics, specifically as it relates to deficit spending debt and inflation, so encourage you to be on the lookout for that piece if you’d like to learn more about how we’re thinking.
Thanks again for tuning into the February Monthly Market Moment. We welcome your comments or questions and wish you and your families well. Thank you for watching.