Small Caps Leading

Since the stock market lows of mid-March 2020, Small-Cap Stocks have been on a tear relative to Large-Cap Stocks. To explore the point, we graphed the following ratio: VB / VV with 10-years of data. VB is the Vanguard U.S. Small-Cap ETF and VV is the Vanguard U.S. Large-Cap ETF. The ratio demonstrates their relative performance.

VB / VV Over 10-Years

Since the closing low on 23 March 2020, the VV U.S. Large-Cap ETF has appreciated 76.8% (to 12 January 2021). The VB U.S. Small-Cap ETF has appreciated by 112.3%. The difference is stark: Small-Caps have out-performed Large-Caps during the market recovery by a whopping 35.5%.

Small Caps Out-Pacing Technology Stocks Too!

VB / QQQ Over 10-Years

Next, we compared the U.S. Small-Cap ETF to the tech-heavy NASDAQ-100 Index ETF from Invesco (QQQ), over the same period. The results may surprise you! Small-Cap Stocks have outpaced the tech-heavy NASDAQ-100 Index by 27.5%. Since the close on 23 March 2020, the QQQ is higher by 84.8% (vs. 112.3%).

Exchange-Traded FundPerformance:
3/23/20 – 1/12/21
Difference
VB – Vanguard U.S. Small-Cap112.3%
VV – Vanguard U.S. Large-Cap76.8%-35.5%
QQQ – Invesco NASDAQ-10084.8%-27.5%
Small-Cap Stocks have led the way higher since the lows of 23 March 2020.

On the way to the lows in March, investors suffered the swiftest sell-off in modern history: Small caps sold off 42%, Large-Caps sold off 34% and Tech Stocks sold off 28%, all in a month. If you stayed invested, you made-out OK. From the highs in February 2020 to yesterday’s close, QQQ (NASDAQ-100) is higher by 33.2%, while VB (Small-Caps) is higher by 23.0% and VV (Large-Caps) is higher by 16.2%. While it pays to stay invested, the swings can be a challenge.

Finally, we calculated the Volatility of the 3 ETFs over the past 12-months (252 days) and 5-Years (1,260 days). The recent volatility figures are nearly twice the long term averages, confirming that the past year has truly been a wild ride!

Exchange-Traded FundPerformance:
Feb. 2020 to 1/12/21
12-Month Volatility*5-Year Volatility*
VB – Vanguard U.S. Small-Cap-42.0%39.3%22.0%
VV – Vanguard U.S. Large-Cap-34.3%34.4%19.1%
QQQ – Invesco NASDAQ-100 -28.0%35.8%22.0%

Notes:

12-Month and 5-Year volatility are the annualized standard deviation of daily returns over the periods.

All performance figures are Total Return, and assume the re-investment of dividends.

Leader McConnell Kills $2,000 Checks

Majority leader Mitch McConnell wrapped the President’s proposed $2,000 stimulus checks with two hot-button issues, in what appears to be a poison pill of a proposal. Shortly before adjourning the Senate on Tuesday afternoon, the Leader introduced a bill that would combine the (House-approved) increased direct payments with 1. the repeal of online liability protections known as section 230, and 2. the establishment of a commission to study voter fraud. The latter two issues have been touted by POTUS for weeks, but now lack universal support among Senate Republicans and have little support among House Democrats.

McConnell stated the he would not be “bullied” into action despite pressure from President Trump, House Democrats and even some Senate Republicans. Tuesday, the House passed a stimulus bill that would have raised the $600 payments to $2,000.

“The Senate is not going to be bullied into rushing out more borrowed money into the hands of Democrats’ rich friends who don’t need the help,” McConnell said on the Senate floor.

Senate Majority Leader, Mitch McConnell

On Sunday, POTUS signed into law a $900 billion economic relief package that would send $600 stimulus checks to more than 100 million Americans. On Wednesday, Senate Democrats urged McConnell to bring the House bill to the Senate floor for a vote, arguing that a weakening economy and raging pandemic are creating enormous hardship for millions of Americans. “At the very least, the Senate deserves the opportunity for an up-or-down vote,” said Minority Leader Chuck Schumer (D-NY), as he took the floor to blast McConnell in a speech.

Stocks held levels just fractionally below the all-time highs set Monday and Tuesday. With one day to trade, the S&P 500 is poised to log a 15% gain for 2020, the Russell 2000 a 19% gain, and the NASDAQ Composite a 43% gain. The yield of the 10-Year Treasury fell from 1.92% to 0.93% in 2020.

The Impact of Fees

It is important to consider fees with any investment opportunity. Over time a higher-fee investment may lose ground to its lower-fee counterpart.

To look at the impact of fees, we chose two physically backed precious metal exchange-traded funds: SIVR is the Aberdeen Standard Physical Silver ETF, with $825 million under management, and an annual fee of 0.30%; and SLV is the iShares Silver Trust ETF, with $14 billion under management, and an annual fee of 0.50%.

We graphed the ratio of SIVR and SLV over a 10-year period.  Each fund does a fine job of tracking the price of Silver and of tracking the other fund.

At the start of 2011, the ratio (SIVR / SLV) was 101.8%.  Today the ratio is almost 103.9%. Over 10-years, the ratio has gained 2.1%, or 0.21% per year. As SIVR has a lower fee (0.30% vs. 0.50%) its performance has been superior to that of SLV by the exact difference in fees. For a hypothetical $100,000 investment, the difference would have been $2,000, with SIVR being the better performer.

The folks at iShares (Blackrock) do more advertising than the folks at Aberdeen Standard. SLV is 17-times larger by AUM than SIVR, so it may offer better liquidity. When we checked the two markets at 11:00 am on 12/29, we found the following:

BidAsk
SIVR25.27 x 1,00025.29 x 2,900
SLV24.30 x 28,0024.31 x 40,700
Market at 11:00 AM on Tuesday, 29 December 2020

The market for SLV is $0.01 narrower and the quantities bid-for and offered are substantially (15 times) larger. The $0.01 difference in spread amounts to just 0.04% (4 bps) however. This might be important for a very large investor or for a high frequency trader, but probably not for a long-term investor.

Before you make an investment in a fund or ETF, you should look at similar investment alternatives, and consider their fees and liquidity, relative to your needs.

Blackrock purchased iShares from Barclay’s in 2009.

Aberdeen Standard is the investment management arm of Standard Life Aberdeen, founded in 1825.

Disclaimer: It is important to note that past performance is not indicative of future results.

POTUS Taps the Brakes, and Demands More From Congress!

In an unexpected plot twist, the fifth-round coronavirus aid package, which appeared to be a done deal, has hit a last minute road block with President Trump demanding Congress amend the legislation.

After the House passed the $900B package in a 359 to 53 vote and the Senate approved the package 92 to 6, it was assumed that the President would sign the deal into law. In a surprise video announcement on Tuesday night, the President called the package a “disgrace” and demanded changes to the bipartisan legislation. President Trump specifically took aim at funding headed overseas, and direct payments to individuals and families.

“I am asking Congress to amend this bill and increase the ridiculously low $600 to $2,000, or $4,000 for a couple,” Trump declared. “I’m also asking Congress to immediately get rid of the wasteful and unnecessary items from this legislation.”

President Donald J. Trump on Twitter

If the President vetoes the legislation, the House and Senate could vote to override Trump’s decision. After all, the bill passed with a veto-proof majority in Congress. The process, however, would certainly delay the outflow of funds, and fall short of Treasury Secretary Steve Mnuchin’s promise that stimulus checks could begin reaching American households next week. Stay tuned.

Congress Pays-Up!

On Monday, in a 359 to 53 vote, the House overwhelmingly passed a fifth-round spending package. Monday night, the Senate approved the measure in a 92 to 6 vote. The president is expected to sign the legislation on Tuesday.

After six months of negotiations, Congress reached an agreement on a $900B coronavirus spending package. Just shy of $1 trillion, it is the second-largest economic relief bill in the nation’s history. Passed in March, the CARES Act totaled $2.2T.

The legislation includes $600 in direct payments to individuals, $300 per week of enhanced unemployment benefits, and funding for small businesses, vaccine distribution, food assistance, education and child care. It also covers rental relief, extending the nationwide eviction moratorium through January 31, 2021.

Monday’s market action was extremely volatile, with a 2.0% sell-off in the morning, which was followed by a 1.6% rally to the close. The S&P 500 Index was lower on Monday by 0.4%.

JPMorgam Makes the Bull Case for a Bullish Wall St.

In a note circulated over the weekend, JPMorgan Chief US Equity Strategist Dubravko Lakos-Bujas, stated,

The equity market is facing one of the best backdrops for sustained gains in years. After a prolonged period of elevated risks (global trade war, COVID-19 pandemic, US Election uncertainty, etc.), the outlook is significantly clearing with the business cycle expanding and risks diminishing…”

As reported by Yahoo Finance, the average Wall Street call for the S&P 500 Index in 2021 is 4,150. From Friday’s closing value of 3,709 that represents a rise of 11.9%. JPMorgan’s call for 2021 is significantly higher at 4,400, a rise of 18.6%. The JPM strategist suggested a range of 4,200 to 4,600 around his target.

The JPMorgan strategist cited several assumptions that underlie his thesis: 1. World Central Banks continue to supply easy money; 2. Vaccine delivery runs smoothly in the US; and 3. the US ends-up with a divided government after the run-off elections in Georgia.

The S&P 500 is a capitalization-weighted index of stocks price performance in the US.

Past performance in not a predictor of future results.

The opinion of the strategist cited above is his and his alone.

Job Creation Slows

November nonfarm payrolls rose by 245k, significantly less than the 460k expected, according to Bloomberg. October payrolls, were revised down from a 638k rise to 610k, and September payrolls were revised higher from a 672k rise to 711k. The net change in nonfarm payrolls (November data + revisions) was a 256k rise. Employers have added 12.3M jobs since May, slightly more than half of the 22.2M jobs lost in March and April.

This week’s data indicates improvement in the U.S. jobs market with a larger-than-expected decline in weekly jobless claims and the November employment report showing an addition of hundreds of thousands of new payroll jobs, the seventh consecutive month of positive job creation. The pace of job creation, however, has slowed noticeably from the pace seen in the fall. Nearly 10M Americans remain unemployed and millions more are reliant on federal unemployment assistance. With federal assistance and forbearance opportunities set to expire at year-end, and increasingly onerous restrictions and lockdown measures coming, further job losses and business closures are expected. This scenario paints an increasingly difficult scenario for households and workers.

Financial markets see the news for its impact on Fed policy. A weak jobs market makes it more likely the the Federal Reserve will act aggressively at it December meeting. Expectations are that the Fed will increase the duration of its bond-buying program. The Fed’s balance sheet has risen by more than $3 trillion in 2020 alone. See FRB data above.

Home Prices Surge

COVID-induced demand from homebuyers over the summer caused an exceptionally strong spike in home prices in September.

Home values jumped 7% annually in September, up from a 5.8% annual gain in August, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index. That is the largest annual gain since September 2014. Prices are now nearly 23% higher than their last peak in 2006.

Small-Caps Take-Off!

Over the past 10-years, small-cap stocks have had a tough run versus the large-cap stocks. The graph below shows the ratio of the Vanguard Small-Cap ETF (VB) divided by the Vanguard Large-Cap ETF (VV) over 10-years, or 2,515 trading days. Small-cap have underperformed for three consecutive calendar years and five of the past six calendar years.

After a tough start to 2020, small-caps have taken-off, as the initial COVID-19-related shock has begun to abate and signs of economic recovery are a bit more visible. Since the March 18 trough, small-caps have rebounded with a 77.6% gain, eclipsing large-cap’s 52.3% gain by 25.3%.

Small-Cap Stocks / Large-Cap Stocks for 10-Years (2,515 trading days)

For the past 3-months, small-cap stocks have outperformed large-cap stocks by more than 9%. The graph below shows the ratio of the Vanguard Small-Cap ETF (VB) divided by the Vanguard Large-Cap ETF (VV) over 66 trading days.

Small-Cap Stocks / Large-Cap Stocks for 3-Months (66 trading days)

Looking ahead, we cannot predict precisely how this recovery will unfold, but we suspect that the rally in stock prices has further to run (our call in March was 3Q22). We expect volatility will abate somewhat, as the economy returns to a new-normal. This will very likely be an exciting time for active stock pickers in the small-cap space.

The Week That Was 11/20

Treasury vs. The Fed?

Treasury Secretary Mnuchin announced plans to let several market support programs expire on December 31, including the Main Street Lending program as well as facilities designed to protect the Corporate and Municipal bond markets.  Mnuchin feels that these facilities have served their purpose.  Fed Chair Powell disagreed, stating that the Fed “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”

Government intervention in markets is very rarely cost-free and is often accompanied by unintended consequences.  Markets are currently functioning without aid and the expiration of these programs is likely to have little market impact.  The Treasury has the ability to reinstate the programs if needed.

Retail Sales

October retail sales rose 0.3%.  September sales were revised lower, from 1.9% to 1.6%.

October sales were slower than expected, but the recovery from the March / April lows has been remarkable.  Retail sales in September and October were ahead of the pre-pandemic trend.  As with everything these days, the resurgence of the virus and new regulations may exact a toll in the short-term, as the world waits for vaccines to become widely available.

Employment

Initial jobless claims rose last week from 711,000 to 742,000.  Continuing claims fell from 6.8 million to 6.3 million.

Employment gains are slowing and there is a long way to go to recover all jobs lost due to the pandemic.  The first order of business is to control the spread of the virus, which is proving difficult. Gains in employment statistics will likely slow further as COVID continues to surge.

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