January 2021 | Global Equity Markets Review
U.S. equity markets were mixed in January of 2021 with the S&P 500 down -1% while mid cap and small cap indices saw flat-to-positive gains. The largest stocks coming off a hot boil from the closing months of 2020 is not unexpected as the November – December two month price return was the highest in the last 75 years. The S&P 1500, which covers the broad U.S. equity index, fell 0.7% for the month, reflecting the heavy weight of the largest companies.
The chart below illustrates the impact of small company index outperformance since the end of 1994. The bars represent the difference in return of the 2,000 smallest U.S. stocks minus the largest 200 stocks using Russell Index data dating back to December 1994. January ranked as the 14th largest month of small cap outperformance since 1995 with the last three months of 2020 also ranking in the top 25. Historically, small cap stocks have shown a pattern of doing best when investors show a willingness to increase exposure to a rising market. This shifting leadership within the markets is significant and can stretch valuations from already high levels. However, it is important to recognize higher multiples on company metrics like earnings are accompanied by higher expectations and dependency on positive forecasted outcomes.
International stocks followed the lead of the U.S. market with slightly better results. The S&P Global Benchmark Index returned 0.2% in January with small cap benchmarks generally doing better than the largest non-U.S. market indices. Emerging market benchmarks also performed well with the S&P Emerging Market Index up 2.9% helped by strength in Asia markets and held back by weakness in Latin America and Eastern European bourses. The dollar finished 2020 at the lows of the year which helped international returns for U.S. investors. The pattern reversed in January with the dollar strengthening – which helped dampen returns for the month.
We are currently waist deep into 4th quarter earnings and more importantly company provided previews about 2021. As we have noted in previous market reviews the onset of COVID-19 prompted many companies to pull their sales and earnings guidance for 2020. These company-supplied forecasts are critical inputs for Wall Street analysts’ models and recommendations. What we can see so far with the 4th quarter reports and outlooks is encouraging. Revisions to estimates are moving higher for companies which have already reported results and positive changes to models outnumber negative changes by over 2 to 1. The continuation of this trend is critical for higher equity markets as valuation levels suggest little additional returns should be expected from higher multiples applied to company fundamentals.
Overall, equity markets are enjoying the benefits of an accommodative Federal Reserve, fiscally aggressive support by lawmakers and incrementally positive news on the development of COVID-19 vaccines. How quickly the economy responds to the favorable backdrop is the unknown variable. Heavy dependence on a positive global health outcome following a pandemic convinces us managing the risk of equity exposure is as important as following the current positive direction in stocks. Consequently, we are maintaining equity exposure in the middle of allowable ranges.
Important Notes & Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 1/31/2021 for the period indicated. “YTD” refers to the total return as of prior-year end, while the other returns are annualized. 3-month and annualized returns are shown for:
- The S&P 500 index is comprised of large capitalized companies across many sectors and is generally regarded as representative of US stock market and is provided in this presentation in that regard only.
- The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance. The S&P 500 equal-weight index (S&P 500 EWI) series imposes equal weights on the index constituents included in the S&P 500 that are classified in the respective GICS® sector.
- The S&P 500 Growth Index is comprised of equities from the S&P 500 that exhibit strong growth characteristics and is weighted by market-capitalization.
- The S&P 500 Value Index is a market-capitalization weighted index comprising of equities from the S&P 500 that exhibit strong value characteristics such as book value to price ratio, cash flow to price ratio, sales to price ratio, and dividend yield.
- The Russell 3000 Index tracks the performance of 3000 U.S. corporations, determined by market-capitalization, and represents 98% of the investable equity market in the United States.
- The Russell Mid Cap Index measures the mid-cap segment performance of the U.S. equity market and is comprised of approximately 800 of the smallest securities based on current index membership and their market capitalization.
- The Russell 2000 Index is a market-capitalization weighted index that measures the performance of 2000 small-cap and mid-cap securities. The index was formulated to give investors an unbiased collection of the smallest tradable equities still meeting exchange listing requirements.
- The MSCI All Country World Index provides a measure of performance for the equity market throughout the world and is a free float-adjusted market capitalization weighted index.
- The MSCI EAFE Index is a market-capitalization weighted index and tracks the performance of small to large-cap equities in developed markets of Europe, Australasia, and the Far East.
- The MSCI Emerging Markets Index is a float-adjusted market-capitalization index that measures equity market performance in global emerging markets and cannot be purchased directly by investors.
- The S&P Global BMI sector indices are into sectors as defined by the widely used Global Industry Classification Standards (GICS) classifications. Each sector index comprises those companies included in the S&P Global BMI that are classified as members of respective GICS® sector. The S&P Global BMI Indices were introduced to provide a comprehensive benchmarking system for global equity investors. The S&P Global BMI is comprised of the S&P Emerging BMI and the S&P Developed BMI. It covers approximately 10,000 companies in 46 countries. To be considered for inclusion in the index, all listed stocks within the constituent country must have a float market capitalization of at least $100 million. For a country to be admitted, it must be politically stable and have legal property rights and procedures, among other criteria.
- The Barclay’s US Aggregate Index, a broad-based unmanaged bond index that is generally considered to be representative of the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
- The Bloomberg Barclay’s US Corporate High Yield Index, which covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Index performance used throughout is intended to illustrate historical market trends and performance. Indexes are managed and do not incur investment management fees. An investor is unable to invest in an index. Their performance does not reflect the expenses associated with the management of an actual portfolio. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Past performance is no guarantee of future results.
Key Indicators correspond to various macro-economic and rate-related data points that we consider impactful to equity markets.
- The US 10-Year Treasury Yield (%)/bps, is the return on investment for the U.S. government’s 10-year debt obligation and serves as a signal for investor confidence.
- SPDR Gold Trust Price ($), is an investment fund that reflects the performance on the price of a gold bullion, less the Trust’s expenses.
- West Texas Intermediate, which is an oil benchmark and the underlying asset in the New York Mercantile Exchange’s oil futures contract.
- CBOE Volatility Index (Level)/% Change, which uses price options on the S&P 500 to estimate the market's expectation of 30-day volatility.
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