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Quarterly Letter - January 2021

by Peter J. Connors, CFA, on January 01, 2021

“Good riddance!” to a shocking and horrible year on so many fronts, but one that enabled many of us to count the blessings of our lives and better appreciate life in normal times.

“But why is the market going up?” We believe many remain perplexed by the market’s recovery this year, but we would simply say that time-tested adages are holding true.

“Markets hate uncertainty.” That the S&P 500® dropped nearly 30% in March from its February high was little surprise given the dismay that existed as to the scope of the health crisis, its impact on economies and how our leaders would react to manage and help offset its effects.

“Market pricing is forward looking.” By a mere 126 days later, the fastest recovery ever, the current bull market recovered all those losses. How? A classic example of markets looking forward. And, in this case, aided by the injection of unprecedented fiscal and monetary stimulus and the reopening of world economies. Companies and consumers had adjusted to life in a coronavirus world, but not without immense pain and dislocation.

So it appears for now that “V” won that great “Which-letter-describes-the-stock-market-recovery debate” among economists and prognosticators. If you recall, a classic “V” for a quick bottom and steep comeback, a “W” for ongoing fits-and-starts of economic activity, or the dreaded “L,” a reference to a grimmer period of economic activity. Let’s definitely take the “V,” and make it stand for “vaccine,” also, in our march toward eradicating the COVID-19 virus.

But risks remain. Stock valuations do represent a risk in 2021, especially if earnings do not live up to expectations. The economy, the market and stock multiples will continue to benefit from the tailwinds of fiscal policy and monetary policy defined by extremely low interest rates assured by the Federal Reserve. Another risk in 2021 is frothy sentiment as the stock market recently reached new peaks and investor optimism is becoming more widespread. The risk grows that bad news could cause a near-term reversal, as valuation is as much an indicator of sentiment as it is a fundamental indicator.

S&P 500® earnings are expected to continue to rebound as 86% of the 500 companies reported positive earnings surprises in the third quarter of 2020. The Federal Reserve pledges to support

economic activity by holding interest rates near zero until 2023 or until the labor market tightens and inflation rises. And the federal government just passed a new round of fiscal stimulus into law.

Another bright spot is the improving market breadth and rotation away from the “big five” U.S. stocks that dominated performance during the early part of the pandemic. For a large part of 2020, Apple, Microsoft, Amazon, Facebook and Alphabet/Google, the five largest stocks in the S&P 500® by market capitalization, greatly outperformed the other 495 stocks. Shifts have been noted in the latter part of the year from growth stocks to value stocks, from large-cap to small-cap, from defensives to cyclicals, from stay-at-home stocks to get-out-and-about stocks, and from leaders to laggards. New market leadership often complements a new cycle. Value and cyclical stocks are widely forecasted by Wall Street analysts to outperform as the economy resurfaces from coronavirus restrictions.

We may see another dip in economic activity in the near term, but the longer-term outlook appears brighter. We anticipate tepid expansion in the early portion of the year, stunted by lingering measures to slow the spread of COVID-19. As the vaccine becomes more widely available, growth should accelerate with hope of allowing consumer, work, leisure and travel habits to return to more robust levels.

Best wishes for a healthy and happy New Year and thank you for placing your trust in us.



Peter J. Connors, CFA

Important Disclosure

This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Opinions are subject to change without notice.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Connors Investor Services, Inc. [“Connors]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Connors. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Connors account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Connors accounts; and, (3) a description of each comparative benchmark/index is available upon request.

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