Insights & Thoughts

It was the best of times. It was the worst of times.

Mar 31, 2021 | Quarterly Commentary

What a difference a year makes. This quarter wraps up almost exactly a year since the whole COVID thing came on to the scene. During that stretch of time, we’ve witnessed a roughly forty percent decline in stocks to the record highs of today. It’s been a wild ride for sure.

Times like these are instructive for a number of reasons. The most important reminder in our opinion is how difficult, and some may say foolish, it is to chase or react to big swings in the market at the moment. You never know what the next day, month or quarter is going to bring. Who would have thought that despite a near total economic meltdown, a year later, just about all the major stock indices would be where they are today?

The fifty-two-week high and low spread in the S&P Small Cap 600, Mid Cap 400 and Large Cap 500 were 109%, 81% and 50% respectively. The chances of an investor correctly guessing not just when to sell, but also when to jump back in during these huge changes in momentum would be practically impossible to time. Any small error in timing would sure mean missing much of these returns and have a serious impact on the long-term performance of a portfolio. This year was especially unusual in that these swings occurred in such a compressed period of time. But the same principles apply to multiyear corrections too. This is why, as many of you have heard, we have always preached that there are only two days you care what something is worth – the day you buy it and the day you sell it.

Another interesting observation to point out is how different the various indices have performed during this time frame. Small cap stocks more than doubled the rebound of the large cap sector. This reflects not just the degree that they sold off, but also the shifting appeal in valuation. For several years, the S&P 500 has outpaced most other indices. This has led to a situation where large cap valuations have become significantly higher than most other stocks. After years of pouring money into the same names, investors have started to recognize the disparity in valuations. So, despite the fact that large companies have faired far better during the pandemic, investors have directed their attention to cheaper areas of the market. This distinction has also been seen in growth verses value stocks. For years, growth stocks have performed better than value stocks. Changing momentum is now favoring value over growth.

These trends can be best seen in the first quarter returns. Small cap stocks are up roughly 17% year to date. Mid cap stocks are up about 14% and large caps are up almost 9% this year. Small cap value stocks have increased an amazing 22% this year. Mid and large cap value stocks are higher by 19% and 12% respectively. The lesson here is that it’s good to have exposure to a broad range of stocks because over longer periods of time, your returns are better and smoother.

One of the obvious questions is why the stock market is seemingly doing so well. We’re mostly through the pandemic, so there’s clearly some optimism about that, but it can only account for the rebound and not the net gains. We believe the gains are due to the massive amount of money the federal government and other central banks have dumped into the economy. There has been a two-pronged approach by the government to stave off a recession/depression during the shutdown. Those are direct cash payments to various institutions and individuals and a reintroduction of quantitative easing (I.e., printing money). Both of these can be measured in trillions of dollars.
We assume most of these policies will remain in place during 2021 and probably in 2022 as well. Direct payments will likely be replaced with “infrastructure spending” (whatever that is) and monetary policy


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