In our last newsletter we reviewed the year as of September 30th. The re-openings in May, the tragic weather around the country, hurricanes, tropical storms, wild-fires and now we add massive snowstorms on the east coast. Dozens of retailers and restaurants have filed bankruptcy and shuttered their doors forever. We concluded our last newsletter looking ahead to the 2020 presidential election and hoping for the approval of a COVID-19 vaccine shortly.
They say a picture is worth a thousand words; the above picture sums up this year as far as investments. As COVID-19 shut down Wall Street and Main Street, as we all learned to work from home, meet over video conferencing vs. in person, shop online vs. in store and educate our children at home over Zoom, the stock market soared to new highs.In our last newsletter we reviewed the year as of September 30th. The re-openings in May, the tragic weather around the country, hurricanes, tropical storms, wild-fires and now we add massive snowstorms on the east coast. Dozens of retailers and restaurants have filed bankruptcy and shuttered their doors forever. We concluded our last newsletter looking ahead to the 2020 presidential election and hoping for the approval of a COVID-19 vaccine shortly. Pfizer was first to market with a vaccine, followed up shortly after by Moderna. There was vast optimism over the vaccine being widely distributed and the economy reopening sooner than later.
The best quote I have heard this month:“This is the end of the beginning, but not the beginning of the end.”
Vaccines are here, but not in the quantity we had hoped. Self-quarantining and wearing masks are here for a while. We will still see pressure on industries like travel, restaurants, retail shopping and theaters. The story for 2021 will be if the current vaccines will work on new strains of the virus.
We saw a stimulus bill pass through the House and Senate with bipartisan support (92-6 in theSenate). $900 billion COVID-19 relief aid plus $1.4 trillion in government funding. The bill was5,593 pages and the second largest economic relief in U.S. History, after the $1.8 trillion in March. The bill provides $300 a week in federal unemployment benefits on top of state benefits, a $132 billion increase in the Supplemental Nutritional Assistance Program (SNAP), a one-time $600direct payment to most individuals and $25 billion in assistance to help pay past-due rent. There was $20 billion to buy more vaccines and $8 billion to distribute them. Schools will get $82 billion; with colleges and universities receiving $23 billion. There was $284 billion for PaymentProtection Plan (PPP) loans for small businesses and $15 billion for airlines.
The stock market had a great fourth quarter and a great year. The Dow Jones Industrial Average (DJIA) was +11.8% in November, the best single month gain since 1987. For the year, the DJIA was + 9.7%. The S&P 500 was +10.8% in November and +18.4% YTD. However, the market in 2020 was driven by technology. Stocks like Apple, Amazon and Microsoft helped to drive the NASDAQ +44.9% for the year.
We do not typically talk much about our specific investment ideas in our newsletters, but I want to highlight a few. Like many people, we have long loved Apple products and the ease and convenience of Amazon. We did not like the valuations on these two stocks as they were expensive from a valuation point of view. In March when COVID shut down America, Amazon was a clear beneficiary. The stock was cut in half while orders where growing exponentially. We purchased both Apple and Amazon for our individual stock investors right near the March lows. The reason we are discussing this is to point out that valuation matters and buying great companies at the right valuations make great investments.
We could tell stories about all our stocks, but a couple that show the impact COVID has had are Costco, FedEx and Visa. In November, Costco announced a special dividend of $10/share. At a time when most retailers were facing bankruptcy, Costco had an extra $4.4 billion in cash. FedEx, a company we have owned for a very long time, recently warned that demand is out stripping capacity and they have raised rates as a result. Some retailers were even having shipments declined. Visa saw year-over-year payment volume increase 6% in November. These are trends that will forever change the way we shop. More online sales, more shipping and more use of non-cash payments.
Looking at the current market, we finished the year at all-time highs in price and valuation. As we look at the chart below, the price-to-earnings (PE Ratio) is as high as it has been since the late 90’s technology bubble.
One of the main reasons the market valuations are so high, the top ten stocks in the S&P 500now make up 28.6% of the entire index. This is an all-time high.
Another big change for 2021 is the inclusion of Tesla in the S&P 500. Tesla entered the Index toward the end of 2020 as the 8th largest component of the index. There is $11 trillion invested in S&P 500 index funds and ETF’s that track the S&P 500. Tesla increased 14% in one week as index fund managers had to buy the stock to track the index. Tesla is trading at a forward P/E of175x. As we showed below, the S&P 500 is trading at 22.3x. While we would love to own stocks like Tesla, valuation does matter, and we will continue to wait for a better entry point.
In 2009, we decided based on the Global Financial Crisis to exit our positions in international investments. Since that point, the S&P 500 is up over 400% while the All Country World Index(ex-US) is up around 150%.
We stayed out of international investments for the last 11 years. Given the current valuations above in the S&P 500 and our belief that growth will be better outside of the U.S. for a period of time, we recently initiated a position in international markets using the Goldman Sachs GQGPartners International Opportunities. The fund’s investment philosophy is very similar to ours in that the fund is actively managed and each holding undergoes a fundamental evaluation of the business, potential growth, and valuation. We have been tracking the fund for several years. Rajiv Jain, the manager of the fund, has over 25 years of international investing experience. The fund is marketed by Goldman Sachs, but is sub-advised by GQG Partners, the firm Rajiv launched four years ago after a successful career at a large global investment firm.
Another trend we saw in 2020 was the rise in oil, gold, and cryptocurrencies. Oil futures were priced negatively briefly earlier this year and have now rebounded to over $50/barrel. We have watched gold soar to new highs as fear of a weaker US dollar and higher inflation have led investors to seek the safety of gold. Finally, Bitcoin and other cryptocurrencies have seen gains that are definitely not indicative of a currency and trading much more like a speculative investment.
Welcome Shannon Yarbrough
We are excited to announce the addition of Shannon Yarbrough to Paragon. Shannon joined us on Oct. 19th , working with Alexis and Tyler in Operations. Shannon comes to us with 20 years of experience in the financial industry and a proven record of providing excellent service. She will be using her experience to help support our clients in their day-to-day administrative needs. Shannon graduated from Missouri State University with a bachelor’s degree in Accounting. Shannon and her husband Mike live inOverland Park and have two beautiful daughters.
President and CIO, Craig Novorr, was recently interviewed on the Sharkpreneur Podcast discussing what makes Paragon different and our recent success with structured notes and callable yield notes. If you have not had a chance to listen to the 18-minute interview, you can hear it using the following link. https://bit.ly/2XA9KF5
Craig Novorr, President and Chief Investment Officer was awardedthe Five Star Professional award for 2021. This is the ninth time he has been named an award winner under the current program and the13th time total between the old program and the current since joining Paragon in 2006.
This is a newsletter that discusses the 4th quarter of 2020. We do not typically comment on the events that have taken place since the end of the quarter. However, the first week of 2021 has been historic. As I write this newsletter, I am watching the aftermath of the breeching theUS Capital. This is the first time the US Capital has been breeched since 1814. January 6, 2021,a date like 9-11 or other historic dates that we will not forget and will talk about for the foreseeable future. We will discuss the aftermath of today’s events in our April newsletter and on LinkedIn and Facebook. See the links to follow us and hear our thoughts on events as they unfold.
For up-to-date news and thoughts from Paragon, plus interesting articles on topics like saving and investing for children, taking care of elderly parents and their finances and other timely topics, we encourage you to follow us on LinkedIn and/or Facebook. We have company pages for both and appreciate your liking and/or following us. Also, please share your experiences with friends and family; we love the opportunity to help those you know with their financial success. Even though Paragon’s offices remain temporarily closed due to COVID-19, we are all working from home and staying in contact with each other daily. We are available to meet with clients at our office by appointment only and are also available to schedule account reviews via video or phone conference.
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