Domestic Markets – 4Q20 Review
The ‘gro-mo’ trade (growth and momentum) has reached a level where Nasdaq stocks are outperforming the broader market by magnitudes last seen in the dotcom bubble.
U.S. equities closed out 2020 on a high note, with the S&P 500 Index climbing 12% in the quarter. The real action was down cap, as the Russell 2000 Index rallied 31% over the final three months of the year – the largest quarterly gain on record. The gain in small caps is particularly notable, given the disproportionate pain that has been incurred by smaller businesses in 2020. Granted, small caps tend to lead the broader market coming out of a recessionary period; that said, it will be interesting to see if fundamentals will be able to support the price momentum that took place in the quarter.
At first glance, the full-year 2020 returns of 18% for the S&P 500 and 20% for the Russell 2000 look impressive – and they are – until one sees the 43% return for the tech-laden Nasdaq Composite. While the strong gains garnered by some tech stocks were justifiable in light of the products and services they provided during the pandemic, there are clear pockets of froth forming within the space. All things EV (electric vehicles) are one such example of the retail frenzy currently in play. While such euphoric behavior may certainly continue, suffice to say that investors’ current infatuation with these no revenues/no earnings/no problem stocks is unlikely to end well.
One notable shift in the quarter was a reversal in the longstanding growth over value trade that has dominated the current cycle. The positive vaccine news was an upward catalyst for equities in the aggregate, but in particular for ‘old economy’ sectors such as energy, financials, and industrials. Could the move in the quarter mark the beginning of a more durable rotation to value? Given the magnitude of the discount to which value stocks are trading vs. growth, a continuation of this catch-up trade is certainly possible. And with many value sectors hit hard during the pandemic, the asset class may be poised to disproportionately benefit from a return to a more normal economic environment. As opposed to thinking in terms of growth or value when evaluating a company, the focus at Cambiar remains on finding great businesses that we believe can perform well regardless of the market backdrop.
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