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  • Chip Barnett

Not Your Grandparents' Roaring '20s

January 2021

One of my goals this year is to make these letters less wordy. Understanding investing is so important, but the economics behind it can be somnolent.

A couple numbers about last year: From January 1, 2020 through the March 23 Covid low, the large cap S&P 500 index was down 30.8%. From that low through the end of 2020, it was up 67.9%. For the full year 2020, including dividends, it was up 18.4%.

We did the right thing in our portfolios by not selling into the panic. Some stocks did extremely well after the March low (the “stay at home” stocks) and some were flat for the year. We didn’t guess about what stocks to pick - we remained patient with the asset class.

In 2019 and early 2020, we were heading into recession. In most of the rest of 2020 w were coming out of one. Historically, this pattern favors large caps going into recession and small caps coming out. That’s what we did: on May 12 we reduced our large cap and started a new position in small cap. From that date through December 31, 2020, large caps went up 30.0%. Small caps went up 54.8%.

Charts take up space but are much better at telling a story than my wordsmithing. Here’s one that depicts why I think we stick with small cap for now:

Large cap tech CAN continue to grow faster than the rest of the market. I happen to think it won’t. If I am right that this extreme concentration won’t last forever, then almost by definition smaller cap and companies that are more “value” than “growth” should do well. Value isn’t as sexy as growth; their stocks don’t go up or down 10% a day for days on end. But they have earnings (see below), they tend to be inexpensive, and in a volatile market like we have these days, value in the portfolio reduces anxiety.

So if last year’s shift was incrementally away from large cap and into small cap, then this year’s idea is from growth towards value.

The print on this chart is small. The squiggly line at the bottom is a value of 100 left to right from 2015 through 2018, and today the top right value is 400. I call this Roaring (20)20,or, “priapism.”

I don’t think we have a decade of this to look forward to. Eventually, priapism ends. But, low interest rates, possibly higher inflation, new federal stimulus, and an increasingly vaccinated public all make for bullish conditions for stocks. I just think the prudent shift here is out of growth/no-earnings and into value.


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