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While December moved higher, it definitely did not get much carryover of the energy from November's huge gains. Can January push forward and what are the strongest themes which may influence stocks and bonds for 2021?
 

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AS OF LATE   

     I know many of us are quite interested in leaving 2020 far behind and focusing on the hopeful benefits of 2021.   While I have a vision for some hopeful changes as we move into 2021, I also think we can benefit from some of the occurrences which we saw in 2020.

 

     So let's first review some of the positives and the negatives in markets from 2020. One of the first positives that stand out is that interest rates on mortgages, automobiles, and the like are in many cases at all-time lows.  Interest rates for home buyers have never been this low in the history of the United States. While this is verifiably true there's also still more downward pressure on mortgage interest rates currently. We will try to keep you up-to-date on that in our monthly newsletters. The reason is that this economy really cannot have anything else slowing it down.  A year ago today, we had record employment, stronger than employment had been in 70 years!  Currently and for the past several decades' homebuilding has really been the engine that drives the economy. It creates a massive amount of jobs across a multitude of sectors of employment, it makes money move in large blocks as no other consumer activity can and it builds dependable value for municipalities and states in terms of real estate taxes. 

Though long term government bond rates are not tied to mortgage rates in a 1:1 fashion, long term government bond rates can put pressure on mortgage rates at certain times in some economic cycles.  2020 was definitely one of those times when the pressure was there.  We may actually see this uncouple to some degree in 2021. Bond rates may rise while mortgage rates stay about where they are or they may even sag downward some more.
     

 

Mid-term U.S. Government Bond interest rates dropped by 50% in 2020.
 

 
 

     In the above graph, rates fell, and remember that prices on bonds move opposite of rates.  So with rates down all year long, if you owned the bonds during this drop in rates, you made great money since bonds rose in price more than 15% in 2020. 
   
      As we step back and look at the stock markets, we easily see lots and lots of changes occurring and much of it occurring in very short time frames. Volatility was through the roof at times in 2020.

     The month of January gave stocks only a fractional loss.  As it turned out it was just the beginning of stronger downturns which hinged in a highly related way to Covid but earnings for corporations had peaked all the way back in the third quarter of 2018.  Stocks were ripe for a pullback and they were just looking for a reason to fall.  So the trigger for the "primed for a pullback" in stocks came quickly. February brought slightly more than an 8% downturn, followed by March which dropped by more than 12%! Thoughts of a potential repeat of the market crash of 2008 seemed to weigh on many investors' minds as the first quarter of 2020 came to a close.
                                                                                                                                                                                                       

.The First Quarter of 2020 - Worst quarter in a decade.


     

     But there were a few bright spots from the first quarter of 2020.  Both of these are areas we invested in and openly discussed month after month during 2020. The two we spent ample time reviewing were long term government bonds and precious metals.  In the first quarter of 2020, long term government bonds rallied very nicely and were up 20%+ while stocks were down 20%+ over the same period.  Another area of performance was with precious metals. Precious metals held their own in the quarter and they went on to finish the year up more than 45%.  Thankfully they didn't have to climb back up from their big fall in the first quarter as stocks did. To Capital Research's way of thinking, this falls under the heading of true diversification.
 

Not all investment areas were negatively impacted by the impact of Covid.
U.S. Government Bonds and Precious Metals defied the downward spiral.

 


     Times like the first quarter of 2020 are precisely one of the key reasons why we use mathematical/quantitative models for investing. Models don’t worry or fret about what's in the news, pandemics, elections, all-time highs, and the like. Models continuously walk through the math and keep the risk factors that have been programmed into them always on the front burner.  I have not kept count over the last three-plus decades yet there have been so many times one of our models got so close to telling us to buy or to sell and then simply the model stepped away from that possible action seemingly a day or two before we thought it would happen. It has saved us numerous times from making a reactive decision to something we thought might or surely would occur. 

     So we glanced at the first portion of the year, now let's move to the latter portion of 2020 and see if any change came into play.

 

     Plenty occurred in the fourth quarter.  The month of October was basically a soft month and nothing too exciting occurred at all. Then we hit the first week of November and stocks just simply roared ahead! Shooting for double-digit returns in the month of November and it actually turned out to be the strongest monthly return for a month during the last 30 years. As we stepped into December many hoped that the strong rally from November would continue but there was just no leftover energy after the strong push the month before.   While December closed positive, up more than 2%,  there seemed to be no true Santa Claus rally which occurs typically between Christmas and New Years'.

 

     One thing we did see and commented on it in our last newsletter, value stocks and small-cap stocks, specifically the Russell 2000 and the MidCap 400, seemed to defy gravity as well as defy the S&P 500, and the Russell and the mid-cap climbed precipitously higher as we moved to the end of the year. 

 

     It is not unusual early in a healthy stock rally for markets to make their biggest moves in the earliest part of the cycle.  As a rally begins to age some, the strength in it does tend to abate some and the growth will settle down as well.

 

     We do see there is some degree of separation in this rally, some stocks doing very well and yet there are other stocks, susceptible to the business declines based on the spread of the virus, which struggle today and will struggle until the virus is well on its way out.  That gives us a divided market going forward which will look like this, <,  some rising more and some falling as it all plays out.

 

     We have made several changes in November and December which helped us take advantage of some of the strengths our models have picked up on.
 

A busy year-end gave positive messages to a year of negative news. 


    We do see 2021 being a very different year to 2020 and with that, the areas which will bring strength to the stock market and the bond markets will be very different than we saw one year ago today. 

     Definitely something to think about.  All the above said for 2020, remember that since the first day of this century, with reinvesting all dividends, the true rate of return for the S&P 500 is.... 4.447%/year!


Please let us know if you are interested in having an online appointment with us rather than doing a face-to-face meeting.  We have been doing online meetings with clients long before Covid showed up.  We do reviews, updates, or introductory meetings online if you would like for us too.

      

We remain watchful. 

 


Ken Graves, Chief Investment Officer

Capital Research Advisors, LLC
 
 

 

CaptialResearchAdvisors.com 

Capital Research Advisors, LLC, 
4185 B Silver Peak Parkway, 
Suwanee, GA 30024 
770-925-1000 
800 -767- 5364 
All rights reserved

 


Mortgages (click here)  

 

The strong drop in mortgage rates may be easing a bit right now. Are we at the bottom or is this simply a pause that refreshes and rates will go lower? It is hard to know at this point. We do indeed see long-term Government Bond rates rising but this can happen and rates on mortgages could still go lower. 
Refinance and maybe make some easy money every month for the next 30 years.

P/E??
A little market lingo.

What Is Price-to-Earnings Ratio – P/E Ratio?

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.

So, if you look at the price of a stock and then look at the earnings per share of that stock (easy to find and published everywhere), the P/E tells you how many years it will take at the current earnings rate for that company to support that price! 


This simple chart here shows you how much the P/E can move around from one quarter to the next!


So now, look at the chart below and find the HIGHEST PE and the LOWEST PE.  Email those numbers to us and we'll send you one of our beautiful umbrellas and some great chocolates!
LIMITED TO THE FIRST 10 Correct responses.




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This report/summary is to be considered general in nature, reflects our opinions and is based on our best judgment at the time of writing. All information is deemed to be from reliable sources but we cannot guarantee its accuracy. No warranties are given or implied as to their promise of occurrence in the future or their accuracy. It is the readers’ responsibility to decide if any of our opinions are suitable for their own individual situation, and in what manner to use the information. No specific decisions should be made based on this report. These opinions should not be construed as a solicitation for any service. Past performance does not guarantee future results. The opinions expressed in this piece are those of the author and do not necessarily reflect the opinions of Ceros Financial Services, Inc.

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IMPORTANT DISCLOSURES

All the information in our newsletter is believed to be reliable and much of it is based on the proprietary research of Capital Research Advisors, LLC itself. However, because of the volume of information we review and the frequency with which it changes the information can only be provided as is on a best efforts basis. The information is not intended to be actionable investment research and therefore should not be used as such. Sources for this information include, but are not limited to, CBS MarketWatch, Big Charts, Bloomberg, Streetscape, Money/CNN, Futuresource, Stock Chart, Yahoo Finance, AmiBroker and http://www.newyorkfed.org/

CaptialResearchAdvisors.com

Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
770-925-1000
800 -767- 5364
All rights reserved







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