The first three weeks of 2021 saw a continuation of market themes that prevailed during the second half of 2020. Ongoing debate about a new stimulus package, coupled with fits and starts with the COVID-19 vaccine distribution, caused a constant rotation in market leadership between stocks that would benefit from an economic reopening and stocks that would benefit from continued stay-at-home policies. All told, bullish sentiment prevailed, and the S&P gained 3% in the first three weeks of the year.
The story changed dramatically at the end of the month, when retail investors collaborated on websites like Reddit to bid up the value of many distressed stocks that had been heavily shorted by hedge funds. The prices of these stocks skyrocketed, causing hedge funds to lose billions and ultimately resulting in trading restrictions on brokerage platforms. Overall volatility spiked and the S&P 500 ended January down 1.0%.
Returns were mixed in other asset classes, a reflection of investors’ growing caution toward the end of the month. Small Cap stocks (Russell 2000) gained 5.0%, while Mid Cap (Russell Mid Cap) fell 0.3%. International stocks (MSCI EAFE) dropped 1.1% amidst further European economic lockdowns and a slow rollout of the COVID-19 vaccine across the region. Bond yields rose in anticipation of further economic stimulus, causing existing bond prices to fall. The Barclays Intermediate Govt./Credit Index fell 0.3% in January.
As we enter February, we expect that the battle between retail investors and hedge funds will continue. This is likely to cause additional stock market volatility as hedge funds look to limit their risks and reduce overall stock exposure. History shows us that this will likely end badly for retail investors and some hedge funds, but we expect the impact on the overall market to be transitory. Our portfolio’s focus on large, high-quality companies has provided a layer of protection against recent events, and we believe that when the dust settles, that strength will be reflected in returns.
We continue to be encouraged by progress in the fight against COVID-19. The pace of U.S. vaccination is now averaging 1.3 million doses per day (Bloomberg), and the Johnson & Johnson vaccine has shown effectiveness in preventing severe COVID-19 infections. These catalysts, coupled with another round of economic stimulus being discussed by Congress, should ultimately overcome any short-term volatility in the next couple months.
As always, we welcome your questions or comments.
The Stuard & Thornberry Group
Past Performance is no guarantee of future results. All investments carry some level of risk. The S&P 500 Index is an unmanaged, market capitalization weighted index of 500 common stocks widely regarded to be representative of the US market in general. Russell 2000® Index (U.S. Small Caps): Measures the performance of the 2,000 smallest companies in the Russell 3000®Index, which represent approximately 10% of the total market capitalization of the Russell 3000® Index. Russell Midcap® Index: Measures the performance of the 800 smallest companies of the Russell 1000® Index, which represents approximately 36% of the total capitalization of the Russell 1000® Index which is a mid‐cap index. MSCI EAFE Index: Measures the equity market performance of developed markets outside of the U.S. & Canada. MSCI EM Index: Captures large and mid cap representation across 24 Emerging Markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country. Barclays Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Indices are unmanaged and direct investment is not possible. The opinions expressed are those of the author and not necessarily those of Robert W. Baird & Co. Incorporated.
Robert W. Baird & Co. does not provide legal or tax advice. We are prepared to work with your current tax and legal advisors and are willing to make referrals for services Baird may not offer.