Themes that Worked, Enjoying the View, Staying Selective – CJL Market Comment 12.15.20 – by Terry Gardner – YouTube Video & Transcript

In this video, Terry Gardner reviews the themes that worked in 2020, examines the risk and reward ratio for the current stock market, and discusses positioning for 2021, all from the shores of the Great South Bay!

https://youtu.be/QjuDUhef0hw

Video Transcript

Terry Gardner, Jr.:

Hey. Good afternoon, everyone. It’s Terry Gardner from C.J. Lawrence coming to you today, Tuesday, the 15th of December. Coming to you from this beautiful South shore of Long Island again. I got a lot of comments from my last video, so I figured I’d better return to the great outdoors. I seem to get more questions and comments about where I am and what’s going on behind me than I do about my market commentary, but nonetheless. And I’ll discuss the backdrop here in a second, but first off, we want to cover three topics today.

Terry Gardner, Jr.:

First off, we want to review some of the themes that we’ve highlighted this year, particularly during the pandemic, to see how they’ve played out, and to see if there’s some lessons learned that we could take forward into 2021. Secondly, we want to take a look at today’s market and look at the risk-reward to the market. And then thirdly, let’s provide some perspective and some context as we head into the new calendar year 2021.

Terry Gardner, Jr.:

So first off, where we are. Our last video we produced from the North side of the Great South Bay. This is the Great South Bay behind me. We’re actually closer to the South side of the Bay. Over my left shoulder, you could probably see the Fire Island lighthouse. Right behind me to the right is an island called Sexton Island. I talked a little bit, last video, about the oyster and the clam populations returning to the Great South Bay and how good that was for the ecology of the area and for the economy, frankly.

Terry Gardner, Jr.:

We’ve got a couple of friends, who’ve got farms on the other side of that island. They may actually be out there today. They’ve got to submerge all their oyster cages, before the ice comes in to the Great South Bay to protect them from the winter storms. Nonetheless, Matt Welling and Carrie Winter and [inaudible 00:01:42] might be over there right now. But someone asked me in one of the questions and comments that came in about the clam population in the Bay, and there’s going to be a whole new clam operation set up on the North side of the Bay, so what the heck does that have to do with the stock market? So, I’ve drawn a parallel. I’ve actually drawn a parallel to the money management business.

Terry Gardner, Jr.:

So first off, when you think about clams and the clamming industry, the large operators dredge the bottom of the ocean, not necessarily the Bay anymore, for sea clams. And that’s what you find in your Campbell’s New England clam chowder. They basically scoop up everything along the bottom and process it. And then there are the somewhat semi-commercial or individual clammers who use large rakes and tongs to scoop up dozens of clams at a time. They’re still somewhat out on this Bay and other areas of Long Island, and they try to generate bushels of clams at a time for sale, at wholesale or even at retail. And then thirdly, there’s the occasional and more discriminating clammer who might wade into these waters and use their feet or a small basket rake to scoop up individual clams, and choose them carefully and put them into their bushel. That’s like the money management business with the large operators scooping up everything, the whole market, that second group scooping up large sectors or packages of stocks, and then there’s the CJ Lawrence’s, shameless plug, but got to feed the family, right? So, we scoop up individual clams, individual stocks, and we analyze them and we inspect them before we put them into your portfolio, into that bushel. So, there’s the analogy between the clamming industry and the money management industry.

Terry Gardner, Jr.:

So let’s get to the market commentary quickly. So, we had a couple of videos that we should take a look back at this year. And by the way, my videos focus mostly on the US stock market. You should take a look at my colleague’s videos, Bernhard Koepp, talks a lot about the macro economy, global macro, he takes that perspective in his videos. Both worthwhile for you to take a look at their videos as well. We remember back in March, we talked about looking across the valley. The pandemic was hitting and our suggestion was, this is going to be a one-time event, it’s going to be really painful, but you got to look forward if you’re going to invest into this market. It’s very difficult to get in and out of the market.

Terry Gardner, Jr.:

And that holds true today. So that theme played out well. We followed that with a whatever it takes video, talking about can we get the monetary authorities and the fiscal authorities to act in concert, to flood the market with liquidity, to keep markets functioning well and to protect and help consumers through the pandemic. And we got that at the time, so, that was helpful. Then we followed up with a down 25 analysis. I don’t know if you remember that, but we talked about when the market is down 25%, we look back historically the times when that had happened previously, the market tends to have a good run in the 12 months following. And sure enough, if you had bought this market back in March, when it was down 25%, and it was down 33 so you had a little bit further to go, but if you bought down 25, you’re up 50 today.

Terry Gardner, Jr.:

So that was turned out to be fairly pressured. And then we talked about the tilted B recovery. We knew that this market was going to drop like a stone, just like the economy would as well. And the recovery would be somewhat gradual forming somewhat of a tilted V, but that the slope would be gradual and up and we wanted to invest ahead of that upward sloping side of the tilted V. More recently, we talked about normalized earnings. Again, earnings were compressed this year, sales and earnings, because of the pandemic, but the market started to look through that and started saying, “Okay, what would earnings be if we didn’t have the pandemic?” And the long-term, at least for the last 20 years, S&P 500 compounded annual return on S&P earnings is about 11%. So it looked like the market was calculating that 11% out of the 2022 and investing based on those types of earnings.

Terry Gardner, Jr.:

And then finally this market rotation within, which we talked about actually in front of the Great South Bay on the other side, just before Thanksgiving, we have seen leadership change. But I want to make a note about that because I’ve got some other notes on rotation, because what we have seen and what you hear oftentimes is that the market has changed leadership. There’s a new sheriff in town and that tech stocks, which led this recovery and have led the market over the year, they’re still the best performing stock sector for the year, have given up that leadership position. And it’s true and it’s not true. It’s true in that more recently, it has, but if something’s interesting, at least to me, is that technology, consumer discretionary, communication services, the big kind of tech and social media names and Amazon and others lead the market for the year.

Terry Gardner, Jr.:

They’re the number one, two, or three sectors on a year to date basis still. Other industries, more recently, have shown leadership, industrials, financials, even energy. But what’s interesting to me when that happened was that as those sectors took the leadership role, those leading tech stocks that had been leading for most of the year, didn’t fall to the bottom, they fell to the middle of the pack, but they’ve never been at the bottom of the pack either on a year to date, a six month, a three month or on a one month basis. So they’ve not always been the top performing sector. They’ve never been the worst performing sector. I thought that was noteworthy. And then following on that, this rotation that we’ve talked about inside the market, when you think about how things proceeded over the year.

Terry Gardner, Jr.:

Remember we had the stay-at-home stocks rally and carry the market for a period of time. And then as it looked like we were getting towards the bottom, we had the rally in the oversold stocks like restaurants and hotels, airlines, cruise lines, they bounced, it had a big move. More recently, we’ve had the cyclical rally as investors got more comfortable with the prospects for the economy in 2021 and 2022. We’ve had companies and industries that typically follow the pattern of the US economy do particularly well. So we’ve had them kind of provide some leadership over the last several weeks. And then more recently we’ve seen real strong demand for IPO’s. And I think that’s important because what it shows, in my view, is that investors are still looking for growth. They’re looking for excess growth in the markets. When you look at the names that came public, they’re really fast growers, whether it be DoorDash or Airbnb, Uber, Snowflake, Palantir, these are all names that have shown a rapid growth in sales, although they haven’t shown it necessarily in earnings. And we’re going to turn to that in a second.

Terry Gardner, Jr.:

So finally risk reward for the market and some expectations as we go into 2021. The risks are what they were kind of going into last year, the potential for higher interest rates. I’m not sure I see it. I do see the ten-year continuing to bump up against 90 basis points. 1% just can’t seem to work its way through. Higher inflation, we’re seeing it in pockets of the economy, so that’s something we’ll watch. Too weak of a US Dollar. Sometimes the US Dollar being weak is helpful for our exports, but it also creates inflationary challenges for us as well, so we’ll watch that. And one thing I think we should probably keep an eye on is, will we see increased bankruptcies going into the spring as a result of COVID and shut downs, and will those bankruptcies drag down the growth in the US economy? On the positive side, on the reward side of the risk-reward ratio, we’re still in a pretty good backdrop situation.

Terry Gardner, Jr.:

Meaning the Fed is still accommodative, interest rates remain low and they really don’t show any signs of wanting to raise them anytime soon. Congress may pass another stimulus package here in the next couple of weeks. The global economy is recovering. Corporate earnings are growing, not only in 2021, but then expected to grow again in 2022. Valuations are not unreasonable. They’re not cheap, tough to make a case that the market’s cheap, but I think you make an equally compelling case that the market’s not necessarily wildly overvalued, it might be fully valued. And market breadth is pretty good. I mean, we’re seeing stocks rise kind of across the board and that’s healthy for the stock market in general. So in terms of what our expectations are going into next year, the math suggests that stocks will continue to rise, but it’s hard to make a case whether they’re going to rise a lot.

Terry Gardner, Jr.:

The market has digested and anticipated a lot of growth in 2020, looking out to 2021 and 2022. So much of that gain, we think is probably already built into the market. So I wouldn’t be surprised to see high single-digit growth in the major indexes this year. We still prefer secular growers versus cyclical growers. Like the Bay here, when it rises, the tide rises, it raises all boats. We don’t want have to rely on the tide to find the right stocks to own. We want to own stocks that will grow, that will win, that will appreciate, regardless of the backdrop, the economic environment. We prefer disruptors to those that are being disrupted. And we would look for a shift back to fast growers, but with a twist. And this is what we’re going to leave our commentary on. What we might see in the coming year is a pivot from the fast growing IPO’s to a focus more on top-line growers, but that also generates significant cashflow and earnings.

Terry Gardner, Jr.:

Examples, Amazon is a name that comes to mind, and I’m not suggesting everybody should go out and buy Amazon today. Although, full disclosure, we own Amazon in most of our client portfolios. But when you look at the sales and earnings for next year, you’ve got these, again, fast growing IPO’s, very fast growing top-lines, but no bottom-line, no profit. Versus, say, an Amazon where you can get 20% top-line, which is really quite spectacular for a company that size and 30% earnings growth. Those are the types of stories. Not necessarily that one in particular, although we like it, but those are the types of stories that we think are going to rise to the top of 2021. The names that consistently provide you with top-line sales growth and flow that growth to the bottom-line in terms of cash flow and earnings. That’s what we’ve got going into the new year. We hope you’ll reach out when you have some time. We hope you and your families are safe. On behalf of C.J. Lawrence, all my colleagues, we wish you a very Merry Christmas, Happy Holidays, Happy New Year. Stay safe and healthy. And we look forward to updating you on the clam and oyster population and on the markets in 2021. Have a great day. Thanks.

Terry Gardner, Jr.:

If you have any questions about this or the Great South Bay give me a ring here at C.J. Lawrence. It’s Terry Gardner, (212) 888-6403, or shoot me an email at tgardner@cjlawrence.com. Have a great day, everyone.