Investors from both parties experienced a sense of paralysis and dread leading up to the election, often sitting on the sidelines waiting for it. Not surprisingly, the market’s first move after the election was contrarian, moving higher. A Biden victory brought expectations for greater stimulus, which provided a boost to stock prices while also starting to put upward pressure on longer term bond yields.
Despite a surge in new COVID-19 cases, news of effective vaccines spurred demand for stocks and accelerated a rotation from high momentum “stay-at-home” stocks into battered value and physical economy stocks. Small caps fared particularly well, gaining approximately 30% in the quarter.
In our view, mid-summer marked the point when enthusiasm for a select group of high momentum stocks pushed beyond reasonable fundamental justification and into speculative bubble territory. Some parts of the market remained frothy in Q4, which featured high-profile IPOs including DoorDash and Airbnb, making 2020 the biggest year for IPOs since at least the late 1990s. Tesla also captured the imagination of investors and speculators, posting eye-popping gains and entering the valuation range of the five mega-cap technology stocks.
In a turbulent year, sticking with a diversified strategy has once again proven a successful approach. Those who reacted emotionally or attempted to time the market typically fared poorly. Speculators and stock pickers had mixed results. Some are emboldened by gains in high momentum stocks. We urge caution for those using leverage and those concentrated in individual companies or sectors without ample consideration of price.
Personal Capital Managed Portfolios: Personal Capital managed portfolios posted a strong fourth quarter both in absolute return and relative to capitalization weighted indexes. Small cap and international stocks thrived. The Russell 2000 small cap index rose over 30% in Q4 while the very largest mega-cap tech stocks posted solid absolute gains but lagged the overall market as a group. Bond allocations also performed well.