2020 was anything but an ordinary year. In the past 12 months, it had been an eventful yet rewarding year. As of December 14th, the S&P 500 Index rose 12.90% in price year to date, versus the average of 8.9% gain since 1945. Other large-cap U.S. indexes also appreciated this year. For instance, Dow Jones Industrial Average (+4.64% YTD), NASDAQ Composite Index (+38.64%), and NDX 100 Index (+42.70%). Within the S&P large-cap value and growth investment styles, S&P Large-Cap Growth Index (SGX +27.63% YTD) decisively outperformed S&P Large Cap Value Index (SVX -3.70% YTD) this year. Although Small-cap (SML +6.06%) and Mid-cap (MID +10.34%) rebounded strongly from their respective lows, they lagged their larger U.S. counterparts. In global equities, international stocks reversed direction and recovered as evidenced by MSCI Emerging Markets Index (MSEMF +12.18% YTD), MSCI EAFE Index (MSEAFE +3.07%), and MSCI World ex-USA Index (MSWORLD +2.99%).
While some things are likely to remain the same, such as socks outperforming bonds and cash, the current rotation favors some of the laggards. Since the stock market is forward-looking, the economy and the stock market may begin to price in the global reopening from the COVID-19 pandemic next year. Under the reopening scenario, many fundamental investors believe mid-and small-cap stocks, as well as value and international equities, will begin to relatively outperform next year, predominately due to higher profit growth expectations and more attractive relative valuations.
As December comes to an end, there are macro, monetary, fiscal, political, and other factors that will favor a rotation into stocks next year. For instance, PFE COVID-19 vaccine rollout in the U.S., and Moderna's (MRNA) vaccine receiving final FDA approval can help to reopen the U.S. economy next year. The FED printing of money and the buying of debt securities, as well as Central Bank QE programs, will lead to continued risk-taking. The zero-interest-rate environment will continue to force global investors to seek out global equities. The resolution of the U.S. election as it pertains to the runoffs to determine the Senate and the Brexit will come to an end early next year. A second stimulus package in the U.S. will soon be approved by congress. The U.S. Dollar Index has been in a bear market for several months, and this may continue Next Year.
From the technical perspective, there are also signs to suggest investors continue to have a clear preference for stocks.
The Asset Class Relative Rotation Graph shows the rotations of various asset classes against the benchmark Vanguard Balanced Index Fund (VBINX). The only asset class that is moving up and residing in the Leading Quadrant is the S&P Total US Stock Market ETF (ITOT). Almost all other asset classes have been declining within the respective Improving, Lagging, and Weakening Quadrants over the past eight weeks.
Another RRG study shows the relationship between growth and value, large-, mid-, and small-caps, as well as the various combinations also send a powerful message suggesting investors are favoring small and mid-caps as well as value over large-cap growth. For example, value, mid, and small-caps ETFs are rising within the Improving and Leading Quadrants while the large-cap and growth ETFs continue to decline within the Weakening and Lagging Quadrants.
The third RRG study compares the domestic and international stock market against the benchmark MSCI World Index ETF (URTH). Over the past eight weeks, the three foreign indexes consisting of MSCI EAFE Index, MSCI Emerging Market Index, and MSCI World Index reside within the Improving and Leading Quadrants. On the other hand, three U.S. indexes - the Dow Jones Industrial Average, SPX Index, and the NASDAQ Composite Index remain in the Lagging or Weakening Quadrants.
So, the question remains – will the above current trends favoring small-caps, mid-caps, value, and international stocks continue into the New Year (2021) and beyond?