2020 has been quite a year, and in the financial markets nothing demonstrates this better than the chart showing year-to-date domestic returns:
To give this a little more context, here is a chart showing performance before the March lows and after:
A few takeaways from this chart:
- First, it’s fascinating that the US market is up at all in 2020. We had one of the biggest worldwide economic shocks anyone has ever experienced, affecting business and consumption in every market, and yet we are still not looking at a negative year.
- The S&P 500 has done very well in 2020 so far. Telarray portfolios have exposure to the S&P — in fact, our Large Cap Domestic allocation tracks it very closely. Domestic Large is just one aspect of our equity holdings, and definitely was the best performing position we owned in 2020 to date.
- Even more surprising than the S&P 500 is how well Large Cap Growth performed. Tech really drove Large Cap Growth, and a handful of stocks drove tech. There’s a saying going around that points out that the S&P 500 didn’t even work that well this year, it was really the S&P 5. The remaining S&P 495 didn’t really make much progress in 2020, yet the index was buoyed by these big tech names.
- Speaking of the S&P 5, here is an assortment of their valuation measures as of last week, which are unbelievably high by any standard. Of course, they were pretty high going into 2020, but they’ve reached new heights since. Valuations in the S&P 500 are approaching all time highs, specifically nearing levels last seen in the 2000 tech bubble. In fact, the S&P 500 weighted average price-to-sales ratio is currently at an all-time high. But even the indices don’t show the astronomical valuations of some of the big tech names:
What does all of this mean for you and your portfolio?
Financial markets work in an eternal tug-of-war between trends/momentum and reversion to the mean. We can look and see when trends distort valuations, but it’s anyone’s guess when they might come back down to earth.
We didn’t have a crystal ball to know to load up on the FAANG stocks on January 1st of this year, and we don’t plan on selling out of our large cap exposure here in December in anticipation of their potential decline. They might come back to earth tomorrow, or it could be years before we see the big tech names stumble.
It’s not that we’re lazy — it’s that timing the market by sloshing allocations around in long-term portfolios has two major pitfalls. First, we might be wrong (nobody has demonstrated sustained ability to successfully time the market), and second, even if we’re mostly right, realized capital gains will take a heavy toll.
That’s the single most important thing we can convey from the trading and investment team: We don’t know exactly what’s going to happen in 2021. We design portfolios fully expecting to have good and bad years in the markets. Nevertheless, we have some ideas about how the future might play out, and all signs indicate that Telarray portfolios are well-positioned going forward:
- The dollar has fallen 13% since 2020 peaks against a basket of prominent currencies. This is extremely bullish for our international and emerging holdings. Our DFA International Value fund is up 15.79% in the last month, and we are optimistic that this strong performance can continue. In the face of continuing US stimulus, there is pressure on the dollar to continue to decline.
- We tilt towards value in our portfolios due to the evidence of long-term outperformance value has enjoyed historically. Still, value doesn’t always win, and we are actually at the end of the worst three-year period of relative performance of value vs. growth in recorded history (good data for that goes back about 100 years). We believe this trend is due for a reversal, and we’re already seeing it in Q4. We are very optimistic about our value exposure in the coming years.
- Smaller capitalization stocks also tend to outperform larger stocks in the long run, but have lagged in recent years. We have stayed the course, and just like value, we are seeing our small cap funds really take off at the end of the year. To combine this and the last point, we note our Avantis Small Cap Value fund is our best performing asset since October 31, up 32.5% (not annualized!) quarter-to-date.
In conclusion, as we look toward 2021 and beyond, please remember these three things:
- Your portfolios are designed to succeed in a wide variety of market conditions, and by succeed, we don’t mean beat the highest-flying stock index. We have broadly diversified portfolios across market capitalization, sectors, countries, currencies, and bonds. Your return will never match the best-performing asset for the year because your assets are widely diversified. More importantly, we believe your returns (including the bond allocations!) will look a whole lot better than the worst performing asset classes in inevitable market downturns, as we saw in the first quarter of 2020.
- Even if your allocation doesn’t change, your portfolio itself is changing frequently — our rebalancing process takes proceeds from strong performers and allocates it to positions in anticipation of inevitable reversion to the mean.
- If we were starting from scratch today, we would make portfolios that look just like what we have today, including significant allocations to value, small cap, and international positions, with plenty of bond exposure to help smooth things out.
We’ve had a surprisingly great 2020, and can’t wait to see what the future brings. As always, we are honored to work with you and stand ready to help forge a path to your secure financial future.