Plimoth Investment Advisors Logo Market Update from PIA  |  FEBRUARY 2021

We’re on to 2021

As New England Patriots coach Bill Belichick famously responded to questions following a challenging outing for the team, “We’re on to Cincinnati,” so too must we move on from the challenges faced in calendar year 2020 and focus on the risks and opportunities in financial markets ahead of us. While remarkably negative headlines thus far in 2021 following the storming of the U.S. Capitol building by an angry mob and sobering virus death toll figures weigh on all of us, lessons learned must be applied to see our way forward through the numerous challenges facing our country, new leaders, and financial markets.

Hand flipping wooden blocks from 2020 to 2021.

(David) Retail Traders Take on (Goliath) Hedge Fund Managers

Volatility returned to equity markets in the new year, spiking in the final trading days of January. An unexpected series of events drove obscure companies like GameStop and AMC Theatres to top headline positions of financial media outlets. In what played out as a David vs. Goliath saga, coordinated efforts by retail traders, mobilizing through a social media campaign, drove up the prices of heavily shorted stocks, costing hedge fund managers (with every imaginable resource and massive capital advantage) billions to unwind excessively leveraged short positions.

When popular retail brokerage firms such as Robinhood and Interactive Brokers pulled the rug out from under the new‑age traders, the outcry was heard from every imaginable corner of social media and both sides of the political aisle. Front page stories captivated the general public, sending many scrambling to Google to search for the term “short squeeze.” The days of high‑volume speculative trading action stressed institutions responsible for clearing and settling trades and opened the eyes of regulators to new ways in which currently allowable risky behavior (such as the ability of large institutional market participants to sell short more than 100% of the outstanding shares of a company such as GameStop) may be exploited by persistent traders locked inside during a global pandemic.

Market Index Returns Jan 2021
S&P 500 Index -1.0%
Russell 2000 Index 5.0%
MSCI EAFE Index -1.1%
Barclays US Agg. Bond Index -0.7%
FTSE 3 Mo. T‑Bill Index 0.0%

A Pullback from New Record Highs

U.S. equities extended gains into 2021, hitting multiple new closing highs before a selloff in the final week drove stocks into negative territory to end the month. The S&P 500 was lower by -1% in January. Stocks in the Energy sector (the far and away worst performing sector in 2020) were positive, as were Healthcare and Consumer Discretionary. All other sectors of the index provided negative returns. Small cap stocks were a lone bright spot in U.S. equity markets, higher by 5% for the month. Small company stock leadership is typically indicative of an outlook for stronger economic times ahead.

Equity valuations remain elevated with a price to earnings ratio of 30 times trailing earnings. This is high relative to historical levels. However, corporate earnings are showing improvement in the latest quarter and expected to advance further into 2021. Technology‑related earnings are likely to hold up well, while industries heavily impacted by global pandemic lockdowns are anticipated to rebound meaningfully as higher percentages of consumers become vaccinated.

S&P 500 Sector Returns Jan 2021
Communication Services -1.3%
Consumer Discretionary 0.4%
Consumer Staples -5.2%
Energy 3.8%
Financials -1.7%
Healthcare 1.4%
Industrials -4.3%
Information Technology -0.9%
Materials -2.4%
Utilities -0.9%

U.S. Economic Growth Stalled Last Year

Annualized Fourth Quarter Gross Domestic Product (GDP) of 4.0% was insufficient to make up for the dramatic fall off in the first half of 2020. Economic growth in the U.S. contracted by -3.5% on a year‑on‑year basis, the first such calendar year decline since the financial crisis over a decade ago. Personal Consumption slowed in the period, as evidenced by three consecutive months of Retail Sales declines during the critical holiday shopping season. Consumers not only stuck close to home but reigned in previously strong online spending as well. A fall off in spending led to a commensurately higher personal savings rate. The prospects for a measured economic recovery this year remain positive. Jobless Claims have remained high however and will need to recede to allow stronger economic tides to return.

U.S. Economic Growth is Getting Back on Track

The monthly featured chart. Note: Quarterly data through 2020 Q4. Seasonally adjusted at annual rates. Peak activity for 2008 recession defined as Q2 2008. Peak activity for 2020 recession defined as Q4 2019.
Source: Mizuho Securities, BEA.

As shown in the chart above, although U.S. economic growth has not returned to the peak level of a year ago, it is on track for a much quicker recovery than the recession which followed the 2008 financial crisis.

Looking Ahead

Periods of rising market volatility are nothing new to the team at Plimoth. While the rationale will continue to evolve, there will always be a confluence of risks associated with financial markets sufficient to create a “wall of worry.” Keeping perspective, cutting through the noise of information overload, and exercising experienced judgement are what guide long‑term investors through challenging periods; and on to 2021.

Please reach out to one of your Account Officers or any member of our Executive Leadership Team to discuss topics raised in this letter or anything else we can be helpful with.