As many of you know, in an attempt to better explain the construction of our portfolio models for a given forthcoming calendar year, we develop an acronym that describes various “sub-themes” that need to play out for our thesis to come to fruition. For example, the theme for the year 2020 was the word V.O.T.E. with the V standing for the Virus and E denoting the Election in November.
Both themes fortunately came to realization with the virus coming under control and the election results being finalized. All-in-all, it was a decent year for equity investors who stayed the course. For the calendar year 2021, our theme once again begins with the letter “V.” However this time it has a dual meaning in that the acronym has five specific components while at the same time references Value Stocks as opposed to Growth Stocks.
V.A.L.U.E.
Value stocks, after a decade of dramatically underperforming Growth stocks, finally look poised to outperform. Historically, when the economy is buoyant based on increasing employment, modest inflation, fiscal stimulus and accommodative monetary policy, Value tends to outperform Growth. Our proxy for Value stocks, the iShares Value Factor Index (ticker VLUE), is up +20.86% vs. +8.94% our proxy for Growth stocks, the iShares Momentum Factor Index (ticker MTUM). Returns quoted are YTD as of 04/23/2021 and via the following link: https://www.morningstar.com/
OUR V.A.L.U.E. THEME FOR 2021…ON TRACK TO DATE
V.A.L.U.E:
- Vaccine distribution, execution and efficacy will be vital points for the capital markets in how COVID-19 is managed. Certainly not only for the sake of society in general but for commerce to function properly, the “markets” must have confidence in the ongoing outcomes. We are using the official Centers for Disease Control (CDC) website for statistics on the progress https://covid.cdc.gov/covid-data-tracker/#vaccinations. As of April 25, 2021, there have been 231 million doses of vaccines administered.
- Alternatives to fixed coupon bonds, also known as Floating Rate Bonds, tend to outperform in a rising rate environment. It is our belief that Bond investors underestimated the strength of the recovery and the effect that Fiscal and Monetary Stimulus would have on Economic Growth, leaving rates abnormally low at this point in the Cycle. As of April 23rd, Dividend Growth Stocks as measured by ticker VIG are up +8.45% vs. Long-term US Treasury Bonds as measured by LTLT, which have a return of -11.00%.
- Laggards or sectors that underperformed in 2020 to become the outperformers in 2021.This would include sectors like Financials, Consumer Cyclicals and Industrials, which are now on a percentage basis our second, third and fifth largest contained in our models. Financials as measured by the ticker XLF Index are up +21.03% vs. the S&P 500 at +12.06%.
- US Dollar we believe is in a decade of decline and requires a hedge to protect against purchasing power erosion.Several ways investors can protect themselves include owning commodities priced in Dollars and by owning International stocks while taking advantage of the currency translation effect. The Dollar as measured by ticker UUP is down -10.01% over the last trailing one year basis as of April 23rd. Commodities as measured by the DBC Index are up +65.83 for the YTD period ending March 15th.
- Earnings Growth is the ultimate guide post for equity prices, as over the long-term, they typically appreciate at their EPS growth rate plus the dividend yield, if paid. According to consensus analyst estimates as of April 23rd for calendar yearend 2021, EPS on the S&P 500 are expected to grow at a rate of +23% from $141 in 2020 to $174 for 2021. Based on consensus 2022 yearend EPS of $202, said earnings are expected to grow at +16%.
The 2021 economy comprised of four components: rising employment, mild inflation, accommodative monetary policy and significant fiscal spending in the form of infrastructure will continue to play out and should allow our V.A.L.U.E. theme to come to fruition.
