Last week was a quiet one prior to Thanksgiving. News headlines continue to focus on the drawn-out election results and Rudy Giuliani’s hair dye. However, what really bolstered markets last week was hope that a COVID vaccine is around the corner. Investors were certainly thankful for Pfizer and Moderna’s vaccine news. UK-based AstraZeneca has a similar vaccine in the works as well and just announced strong results today. AstraZeneca’s CEO pledged not to make money off their COVID vaccine puts pressure on their competitors to do the same. Good luck being the grinch that tried to profit off the pandemic. Thanks to the upbeat clinical trials news, investor sentiment spiked to multi-year highs. If a COVID vaccine isn’t something to be thankful for, I don’t know what is.
Unfortunately, investor sentiment is not always a great indicator for equity markets. It is one of those “glass half full or half empty” kind of arguments. Some say that when investors are optimistic, they are more likely to invest and spend money. Things that support a robust economy. Others argue that it is a “contrarian” indicator; too much optimism could lead to a post-Thanksgiving feast nap. The last time investor sentiment got to these levels was back in late 2017, early 2018. Soon after the market had a 10% correction.
The timing of high investor sentiment and the market sell off in early 2018 might just be coincidental. Unfortunately, a 10% decline in equity markets happens quite often. Looking back at the last 93 years, the S&P 500 saw an intra-year double-digit decline about 63% of the time. In other words, two out of every three years the markets saw a 10% decline or more. Crazy, right? What’s even crazier is that in those years the market saw a 10% or more decline, almost half the time the market was UP more than 10% the following year. Markets are crazy.
In other “Crazy Market News”, Tesla was finally added to the S&P 500. At almost half a trillion dollars in market capitalization, Tesla is already the tenth largest company in America. That’s why it’s so unusual that Tesla had not already been included in a benchmark made up of America’s largest companies. Speculators bid up shares on the hopes that the buying pressure from all the various S&P 500 index funds will cause shares to spike. Our core holding, the Schwab US Total Market (SCHX) doesn’t follow the S&P 500; it tracks the Dow Jones US Total Stock Market. These two indices have similar performance. SCHX, however, has about 250 more companies than the S&P 500, and one of them is Tesla. For our holders of SCHX, you should be happy to know that the groundbreaking EV maker is already one of its top ten holdings! As all the S&P 500 index funds chase after Tesla, be thankful to know that we already have some.
So, as we near the end of a crazy 2020, many of our clients have been asking for our thoughts on next year. “How does _________ (fill in the blank with: politics, Biden, Trump, COVID, the Fed, Congress, Harris, China, Middle East, Europe, Mexico, interest rates, valuations, oil, gold, bitcoin, and Trump again) affect markets?” So many things to consider. The only thing I do know is that the future is filled with unknowns. Predicting the future is hard enough; forecasting how markets react to that future is nearly impossible. That’s why Apriem’s investment process continues to focus not around predicting the future, but around taking advantage of the craziness that occurs two out of three years. We then continue to monitor markets, thankful for the upswing and waiting for better entry points for outsized opportunities. Until then, we’ll wait it out in core holdings like SCHX.
A bit of a postscript here. For most of you, I’m sure this year’s Thanksgiving festivities will be more subdued than in years past. My wife, Wendy, and I usually host a “Mocksgiving” the weekend before Thanksgiving. I am Chinese and my mom usually cooks a tremendous Thanksgiving feast, but it certainly has a Chinese flair to it. Wendy started Mocksgiving almost twenty years ago with the idea of having a more traditional Thanksgiving. One with all the fixings like stuffing, yams, and green bean casserole. Over the years, our Mocksgiving crew has grown in size. But, as with getting older, there have been some of our crew that have been taken from us too soon. Friends and family that have departed for better worlds. Some spirits can’t be constrained by Earth. So, I’ll end this letter with the same toast I’ve been giving my friends at Mocksgiving:
“Thank you to all the loved ones that could make it here tonight.
Cheers to the ones that couldn’t make it tonight but are still in our hearts.”