12.22.2020 - Market Update

“I wish I could see the future.” In the early 2000’s, NC State ran a halftime ad at basketball games with a kid saying that phrase. I want to see the future too. Riding on the back of 2020’s turmoil, the future may have arrived. No, not the Jetson’s and flying cars, but a large uptick in digital spending and living. Business investment this year took a leap into the digital sphere. In 2015, 55% of business investment was physical: people, plant and equipment. Sure, that number was slowly trending down, but physical investment was still 52% at the tail end of 2019.

The Covid lockdowns appear to have given businesses the push they needed. By July of 2020, digital investments popped to 54% and physical slid to only 46%. There will be some back and forth but maybe digital is on top to stay. Restaurants are a great example. Some companies have mastered the digital space while others floundered. If you’ve ever ordered from Burger Fi, then you know what I’m talking about. 

The Burger Fi app offers a quick and easy digital experience while many smaller chains seem unsure how to proceed. Digital is rapidly widening the gap between the “can do’s” and “we have no idea”. By the way, I finally joined the ranks of the “1%” and even received an email to prove it. No, it’s not “that” 1% of wealthy people. It’s the top 1% of all Burger Fi customers. They made pandemic eating easy. Give it a try, you’ll love it.

Luxury brands are seeing similar trends. The larger outfits like Gucci and Louis Vuitton have more digital know how and the gap is widening to the have-nots. That brings up the question, how much of this is priced in? Yes, Zoom is a wonderful way to connect remotely but is the company worth 133 times next year’s earnings? How about Peloton, the leader in working out at home? The valuation feels lofty to me, and what happens when people can work out in gyms and studios again? Let’s see how quickly the vaccine drives reopening.

The first US citizen was vaccinated with the Pfizer/BioNTech solution on December 14th.  The market yawned in response. That may be because stocks had rallied in advance, but there’s a lull currently as markets decide which way to go. Will the shut-down economy stocks reignite and will the open-ups continue to catch up?

The last three months have been interesting. Which sectors are leading in the 4th quarter? Let’s say I asked you to rank in order of performance the following: Large cap tech (QQQ), Financials (XLF) or Energy (XLE). Most would pick tech as the winner. Big tech has dominated the 2020 headlines but change is quietly brewing. In our competition, tech actually comes in a distant 3rd. Oil dominated with a 34% gain, the financials slotted in 2nd place at 18% and Tech did a respectable 9% return. It feels like investors are focused firmly on the present and aren’t looking forward to the post vaccine world. It’s like taking a long walk and only looking straight down at your feet. It’s hard to see where the longer path leads. 2021 is shaping up to be interesting.

I write often about volatility and its primary indicator, the VIX. So, just how scared are investors? It feels like they’re still skittish. The VIX is the options volatility index and it measures fear so to speak. I won’t bore you with the details but a VIX over 20 typically indicates a higher level of anxiety. The week before the Presidential election was the worst on record. Falling stocks were accompanied by a VIX spike to 40. To put that into perspective, the VIX was at 43 after the 911 attacks. 

  So far, the market has recovered well from that nasty dip, and the S&P 500 rallied 14%. Those market selloff/VIX spike combo are like a forest fire. They clear out the dead underbrush and volatility can stir up both buyers and sellers. 

A VIX spike can sometimes lead to a reshuffling of the deck. Weak holders are shaken out of stocks and momentum players, typically the last ones to the party, are sometimes convinced to sell as well. When the market regroups at lower prices, the game begins again. 

That’s my description for the market’s behavior these last six weeks. The problem for some investors is that they sold expecting the worst from the election. That’s not happened and it feels like there aren’t many sellers left. Those on the sidelines are behind the velvet rope at the club. They want badly to get in but no one’s coming out. The selloff they desire has not happened.

The other issue is that if the VIX drops below 20, the markets could respond with another upward surge. The VIX is currently 21. Looking at history, the market is positive in 77% of the months where the VIX is below 20. Stocks are positive only 42% of the time when the VIX is over 30. The VIX is sliding lower and this may be the market gazing ahead and seeing a positive reaction from the vaccine. 2021 may be pleasant surprise. Thanks to all of you for making our year a good one. 2020 was a struggle for everyone, but it appears we’re past the worst. No matter how you celebrate the holidays, I hope you have a great one. If you have any comments, feel free to contact me at [email protected] or call me at 919-656-0836.

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