When we wrote to our clients at the end of 2019, we opened with the following message:
“As we begin a New Year and a new decade, many financial experts are polishing their financial crystal balls in an attempt to predict what the market will – or won’t – do in 2020 and beyond.
The reality is that no one knows how the market will perform from day to day, week to week or even year to year. That’s why it’s important to take a long-term approach to investing, so you can handle periodic bouts of volatility – in either direction – and still keep your head.”
Well, 2020 did not disappoint. As concerns about the short-term and long-term impacts of COVID-19 became widespread in February and March, the S&P 500 declined more than 30%. As the economic machine sputtered, companies tapped capital markets for hundreds of billions of dollars to (hopefully) ensure they had sufficient liquidity to withstand whatever pressures they might encounter in the months and years ahead. That dire reality, along with ambiguity about what the world might look like on the other side, was reflected in market prices.
Fast forward nine months: at 3,650, the S&P 500 has increased by more than 60% since the March lows. Today, as opposed to the significant unease expressed earlier this year, optimism abounds. The market is pricing in a quick return to normal – and then some – with a high degree of certainty. The expectation of a widely distributed vaccine in the near future, along with the impact of low interest rates and Federal Reserve activity, has resulted in record highs for U.S. equity markets. For the year, the index has delivered a total return of roughly 18%.
As we survey the landscape, this wave of renewed optimism is evident in capital markets. Two notable examples are initial public offerings (IPOs) and blank check companies (SPACs).
High-profile companies that completed their public offerings in the past few months, such as Airbnb and DoorDash, have received significant interest from the investment community. As a result, many have seen their stock prices climb 25%, 50%, or even 100% on their first day of trading. Data from University of Florida Professor Jay Ritter shows that 19 companies have seen their stock price double on their first day of trading in 2020 – the most since the peak of the tech bubble. As shown below, we’ve seen a recent surge in IPO deal value as a result of this heightened investor demand, with the trailing 12-month cumulative issuance around $150 billion as of last month – about 50% higher than at any time over the past 10+ years.
SPACs are another area that has benefited from market optimism. As of early November, the amount of capital raised by these blank check companies – more than $60 billion – has already exceeded the total funds raised by SPACs in the previous five years. Whether or not these are intelligent investment vehicles is of secondary consideration for this discussion. It’s the fact that money is flowing so freely to these entities in recent months that is notable.
Another sign of broad optimism in equity markets has been the rise of the trading platform Robinhood, which has added millions of users throughout the course of 2020. A large percentage of these individuals are inexperienced investors who are actively participating in financial markets for the first time. While the democratization of investing is an encouraging development, something about the explosive growth of platforms like Robinhood feels reminiscent to the surge in day trading during the tech bubble in the late 1990’s. (On December 16, 2020, securities regulators in Massachusetts filed a complaint against the company, alleging that they had failed to protect their customers by “falling far short of the fiduciary standard” that is required of broker-dealers.) Historically, in equity markets it has been an inauspicious sign when the public concludes that stocks (or other instruments like options) are a path to quick and easy riches. Our sense is that’s what has happened as of late, particular over the past nine months.
In summary, we’ve seen a notable change in sentiment – and market prices – over the past nine months. Our job as investment advisors is to survey the landscape as it exists today and to play the hand we’re dealt to the best of our ability while staying true to our philosophy and process. That is what we intend to continue doing, regardless of what’s in store for investors in 2021.
At The Fiduciary Group, we focus on constructing portfolios that enable our clients to maintain their asset allocations throughout the market cycle. In other words, we accept the fact that we cannot predict bouts of volatility. Instead, we devote our time and attention to preparing clients to weather changing market conditions.
We invest in financially sound companies with strong balance sheets that can withstand tough times. We look for sustainable competitive advantages, as well as the opportunity to partner with management teams who are trustworthy and capable. Changes in the stock price will ultimately be determined by the results of the underlying business. The ability to accept short-term market volatility with equanimity while remaining focused on what truly matters is critical to long-term success in investing.
We also believe in the importance of asset allocation and diversification such that clients’ investment strategies are aligned with their future cash needs. We focus on each client’s ability to bear risk and their capacity to withstand the swings that accompany changes in market values. Individual client circumstances inform our investment decisions. Ultimately, our goal is to intelligently balance the mix of stocks and bonds to adequately capture the benefits they provide for investors while also remaining cognizant of their shortcomings. At times like these, it’s imperative for clients to remember that the world of investing will not always be as rosy as it is today. Our objective is to set asset allocations so clients will have the conviction to stay invested throughout the market cycle and experience the benefits of long-term compounding.
As investors, our strength lies in how we choose to react to market volatility. We affirm our belief that a balanced, diversified approach helps clients stay invested throughout market and macroeconomic cycles and puts them in the best position to achieve adequate returns over the long run.
As always, we greatly appreciate the trust our clients place in us.