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With last year’s Bridesmaid (REITs) having laid an egg, the long-term “alpha” of the Bridesmaid portfolio narrowed to +3.7% from a bit over +5% (annualized) when we first published this study more than a decade ago.

Forecasting GDP is hardly our forte, but 2021 should see a very big gain in real output. Our current guess is for real GDP to grow 5% this year. Statistically, though, that doesn’t imply that the stock market’s move will also be large (or even of the same “sign”). 

In recent months, we’ve highlighted some reasons to buy or add to Emerging Market equities, and at year-end received a formal endorsement from our monthly Emerging Market Allocation Model. The signal triggered after a 30-month period in which the model recommended the relative “safety” of the S&P 500—in retrospect, a good call. 

In the extreme case where one possesses no other information beyond last year’s total returns, the best single-asset strategy has been to buy the second-best performer (the “Bridesmaid”) and hold it for the next twelve months in hopes that the prior year’s momentum will carry it through. That approach has beaten the S&P 500 by 3.7% annualized over the past 48 years. 

The AANA Portfolio could be viewed as representing one extreme of the asset allocation continuum—in which no knowledge of comparative asset valuations or economic conditions is assumed (or, at least, imparted). At the opposite pole would be the clairvoyant speculator who puts all of his or her eggs into one basket and holds that basket for the entire year.

Last year should have been a perfect one for “diversification” to shine. Extremely high equity valuations entering 2020? Check. A recession-induced bear market? Check. Massive monetary and fiscal stimulus designed to lift all boats? Check and check.

Inflation surprises have run hotter in the U.S. than in the rest of the world, no doubt reflecting the strength of major currencies versus the U.S. dollar. 

Cap-weighted valuations for the S&P 500 and S&P Industrials are homing in on the all-time records seen in the first quarter of 2000. We’ll confess that after those valuations collapsed in the years that followed, we thought we’d never see them again in our lifetime—let alone a mere generation later. 

The GS Scores handled the chaotic, 2020 market well, turning in a +10.1% return spread. The lone black-eye was November, when the Pfizer vaccine news upended quant factors and produced the worst single-day performance in GS Score history.

Last spring and summer, we were incorrectly skeptical that a new bull had been born only five weeks after the death of oldest bull ever. But be careful with labels. Just as the “bear market” mindset caused us to overplay our hand last spring, equity bulls should not assume the current bull will look anything like the decade-long affairs we’ve seen twice in the last 30 years.

The 200-day “report card” for this bull market shows the best initial-performance gain of all postwar bulls, but it’s come at a price. Investor sentiment is above levels seen at the same point of past bull markets… and there are the valuations. 

Apple, Microsoft, and Amazon collectively added $2 trillion in market cap over the past twelve months, and ended 2020 making up 16.4% of the S&P 500. Those three firms were responsible for a little more than one-half of the index’s +18.4% total return for the year.

Across all of our market-cap breakdowns, Growth beat Value by at least 30% in 2020. In the Royal Blue Index, Growth beat Value by 38%—the largest annual gap between these Growth and Value segments since Growth’s 39% outperformance in 1999.

Half of the Small Cap discount registered at the end of March 2020 (36%) has now been erased. Small Caps have outperformed Large since that extreme reading (Russell 2000 +71%; S&P 500 +45%).

Adding in the third month of Q3-20 earnings reports produces an Up/Down ratio of 1.09. Once again, this figure is pretty terrible relative to this vignette’s history—it is at just the 10th percentile of observations. Lower hurdle rates for Q1-21 will breathe life back in earnings growth.

We remain favorable toward credit and recommend both investment grade and high yield corporates.

We’ve updated our time-cycle composite for 2021 and it looks like it will be a year of “two halves,” with a low-vol bull-market extension in the first half of the year, followed by a much more volatile second half. This also appears to extend outside the U.S.

Information Technology (1st) and Health Care (3rd) continued their long-time status among the top-three-rated sectors (out of eleven broad sectors). Communication Services bumped up to 2nd from 4th; it has not been among the top three since September. Consumer Discretionary moved down one spot to 4th. That sector has been rotating in-and-out of the top-three zone on a regular basis. This is the eighth consecutive month with Real Estate, Energy, and Utilities sharing the bottom-three sector ranks.

We take a look at our historical analysis of industry-group portfolios to see how the “Dreams” and “Nightmares” from 2019 fared in 2020. The industry-group composition of the 2020 Dream and Nightmare portfolios is also presented.

In April 2018, armed with a large number of ETFs and long-enough historical data, we applied our back-testing methodology for individual stocks to the universe of ETFs to determine if the same (or some) of those components could useful for assessing ETF performance prospects. One of the factors we reviewed was fund flow (adjusted by AUM), which revealed that those ETFs experiencing the largest asset inflows proceeded to significantly underperform.