Record November for Small Cap Stocks & 2020 Wrap-Up

By Dean Barber

December 4, 2020

Record November for Small Cap Stocks & 2020 Wrap-Up

Hey, everybody. I’m Dean Barber, Founder, and CEO of Modern Wealth Management. It is December 2nd as we record this. I’ve got Jason Newcomer, CERTIFIED FINANCIAL PLANNER™, joining me today to give you some updates on a record-breaking month in November. Everybody says we want to put 2020 in the rearview mirror, but I’ll take many Novembers of 2020.

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Back to October

Dean Barber: Okay, Jason. Let’s unpack this a little bit. Let’s go back to October before we talk about November. Because, in October, you and I were getting question after question after question, “What’s going to happen if Joe Biden wins? I’m scared to death. What’s going to go on the stock market? The elections got me freaked out.”

Election Cycles

You and I weren’t talking about the election. We can go back and look at Democratic Presidents, Republican Presidents, divided Congress, united Congress, and through all of those cycles. We know that through all election cycles, while there might be a little hysteria at the beginning of them, the difference in the returns of the market aren’t significantly different. So, what were we focused on instead?

October Was a Totally Different World

Jason Newcomer: Yeah, I mean, back in October, there was a lot of talk about the election. In your monthly economic update video that you did a month ago, it was a totally different world. Before the news about the vaccines from Pfizer and Moderna, the focus was solely on the election. The stock market was down. I think the Dow, when you recorded that day, it was heading for its worst week in six, seven months, since the pandemic. So, it was a totally different world back then, and it’s only been 30 days.

COVID-19 is the True Threat

Dean Barber: It has been 30 days, and what we said in that video was basically that COVID-19 posed a far greater threat to our outlook for 2021, 2022, et cetera, than who became the next President of the United States. I think I said during that particular update, “Unless we get a vaccine or some meaningful, effective treatment for COVID-19, it wasn’t going to matter who was in the White House.”

It’s About the Consumer

The American consumer, you and I, our clients, and everybody around us makes up 70% of this country’s gross domestic product. Until the consumer can get out and live their lives and spend money like they want to spend it, we’re not going to see meaningful, robust growth in the economy.

Vaccine News

Well, guess what? Five days after the election, we get the announcement from Pfizer. A couple of days later from Moderna.

November Records

Suddenly, the stock market is on fire, and we had some record-setting numbers in November. What do you think was, in your mind, the most amazing turnaround in November?

Jason Newcomer: You started to see kind of a rotation. Right? The things that during the pandemic so far had been working, the technology stocks, the consumer durable business stocks, those things had been leading the way. 

“Post-Pandemic Stocks”

Suddenly, there was a rotation that took place starting in November with news of the vaccine. You saw the “post-pandemic stocks”, in quotation marks, start to take off, the things that were hit the hardest.

Those are the stocks that turned and led the way. You started to see kind of a weakening at first in the technology stocks. I don’t think that they’re done yet.

Hardest Hit Had the Best Month Ever

But the places in the market that have been hit the hardest, even small cap stocks, really had their best month ever.

Holy Cow, Energy!

Dean Barber: You know, here’s an interesting one. I got another chart pulled up here on another computer screen, but energy. Energy stocks, Jason, still through the time of this recording down to 38.5% year to date, but energy stocks on average were up 28.6% in November. Well, what is that telling us? 

Travel in our Future?

That’s telling us that if we have a vaccine, we might get back to regular travel all of a sudden. Airlines might start flying at normal schedules again sometime in the next 12 to 18 months. Cruise shifts might start going also. People get back out, take vacations, they’ll go to the ballpark, and all the sports will open back up. People will go back out to eat.

A Positive Effect of COVID-19?

The energy stocks were absolutely on fire. Some other phenomena that I think are taking place are even removed from COVID-19. Now, we could say this is a positive effect of COVID-19. 

Home Stats on Fire

Look at real estate. Look at housing. We had 102% increase in mortgage applications from November of ’19 through November of ’20. 102% increase in mortgage applications! And we set a record of a 28% increase in mortgage applications for home purchases. 

Right? This isn’t just refinancing that’s going on here; this is home purchases. I think what we see here with the home purchases will help drive our economy forward for the next several years, and that is the next generation out there, the millennial generation starting to buy houses.

Millennials Buying Homes

Over 35% of the new home purchases out there today are purchased by people between the age of 25 and 35. 

So, that millennial generation is finally really starting to say, “I’m tired of the apartment, ready to start having kids and families. I’m moving out. We’re going to buy a house in the suburbs.” 

You can’t buy a house unless you’re there on the first or second day of the open house because people are getting multiple offers. It’s not just happening here in Kansas City, where you and I live, but it’s happening across the country. I think this is a hugely positive sign for a longer-term economic outlook. What’s your take?

Jason Newcomer: I think it is. And what you’re saying kind of echoes what we’re starting to see in headlines, “Is the 2020s starting to mirror the 1920s?” 

A Roaring ’20s?

Are we setting up coming out of this pandemic for a roaring 20s decade? 

There are some pretty interesting parallels when you talk about the Spanish flu versus the coronavirus pandemic, obviously two completely different scales. I think the Spanish flu, a third of the world’s population, was infected with that virus. So, different scale, although we’re not through the end of the Coronavirus pandemic just yet, there seemed to be light at the end of the tunnel with this vaccine news.

Dormant Cash

However, once we do come out on the other side, how much cash is on the sidelines, waiting to get spent? Whether it’s on vacations or houses or discretionary goods, there’s certainly a lot of appetite to spend money right now.

As soon as we can get that vaccine distributed amongst the public, the sooner we start to see some of those expectations that we’re now seeing being priced into the market start to come to fruition.

Dean Barber: You know, a lot of people are asking the question, “Have we already seen the vaccine bounce? Is this it? And how much further can this go? Are the companies really making this kind of money?” 

Many Beaten Down Sectors

You and I both know that many sectors of the market are still very beaten down, that even though they had some incredible bounce back in November, they’re still way off their 52-week highs. So, while it may be a rotation away from big tech in the short term, I don’t think technology is going anywhere.

Don’t Think Tech is Going Away

You look at Apple, Amazon, Zoom, and these technology companies that drive the way we live. They’re changing the way we live. I think those technologies are here to stay. Those are going to be a part of people’s portfolios.

Is it Time to Look at Small Cap Stocks and Energy?

However, I do think it’s time to take a step back and say, “All right, is this time to get maybe more interested in small cap stocks? Is this time to get maybe more interested in the energy sector?

What About Hospitality?

Is this time to get maybe interested in the hospitality sector, cruise lines?”

Think about Las Vegas and the casino stocks and those types of things. Many of those are still 30%, 40%, 50% off of their February highs. So, if this vaccine does what we think it can do, do those stocks still have the ability to recover, and do we still have some time to make up some ground there or some opportunities?

Technological Advances from COVID-19

Jason Newcomer: Yeah. I’m also really interested to see, of course, we’re not going to find this out for some time, but the other technological developments that come out of this pandemic. 

Similar to the industrial revolution that we had in the 1920s. Now, this is more of maybe a biotechnological revolution that we’ll see play out here in the 2020s with some of these new technologies they’re using with these vaccines.

Let’s Get Through 2020 Already…

Dean Barber: You know, we had some great stuff happen in November. We’re now into December. Everybody, I think, agrees. Let’s get through December, get through Christmas, and get 2020 in the rearview mirror. Let’s move on to 2021, maybe greener pastures. 

Georgia Senate Race

We do still have some political strife out there today. We have a President who hasn’t conceded that he has lost, and still have a Senate race in Georgia that’s up in the air. That runoff election doesn’t come until January 5th. So, there still is some political uncertainty, and some things could change in the markets around that. If the Democrats take both of the Georgia Senate seats, that could change the landscape and the mood of the markets as well. What are your thoughts there?

Jason Newcomer: Absolutely. It’s an important election to watch, and, unfortunately, we’re not going to know the result of the Senate race until after 2020 has concluded. I guess we’ll find out in January if the Republicans pick up one of those seats. Then they have the tiebreaker in the Senate. 

Of course, the Democrats will hold office with the Executive Branch and the House of Representatives. So, if they also control that third Senate, they’re probably going to get through the Biden policy proposals, maybe a little bit easier with respect to tax policies. 

Tax Policies are the Big Unknown

That’s the unknown: where are we going to see corporate tax rates in 2021 and beyond? What are we going to see with capital gains treatment? What are we going to see with the top of the tax brackets? 

Might Be Awhile Before We Know

Those are all things that we wish we had an answer to after the election, but unfortunately, it may be two months after the election day before we have an answer.

Dean Barber: Well, and even as we come back and do this same video and share with you our thoughts for 2020 as a whole, that’s still going to be hanging over our heads. My best guess is we’ll make a special announcement after that runoff election in Georgia, kind of let you know what our thoughts are there.

Back to Energy Stocks

I’m going to go back to energy stocks quickly because that’s been hit the hardest throughout the year, and for a good reason.

I believe that one of the reasons why we’ve seen the energy stocks rebound so much was the thought that the Republicans would retain control of the Senate.

I think the Biden administration’s energy policies are as crucial to the energy sector, as a whole, as the COVID vaccine. 

Because if we approach this with a Democrat-controlled Senate, along with the House and the White House, then the Green New Deal starts to take shape, and that, you know as well as I do, could really put a lot of pressure on energy stocks.

Green New Deal & Energy Stocks

So, while we may think that we’ve got a green light because of COVID, we may still have the Green New Deal coming around the corner if the Democrats take control of the Senate by winning both of the Senate seats in Georgia. So, that’s unknown. 

Don’t Load Up on Energy Stocks Just Yet

It may be a little bit too early to load up on those energy stocks, which are still down close to 40% on the year, but I still think there are some opportunities out there. Obviously, we’re keeping an eye on those things. 

Rebalancing Your Portfolio

Jason, one of the things that we’ve done throughout the year, and I know you wrote an article on it, rebalancing in times of rapid market growth or even market decline. 

We’ll surely be doing some more of that towards the end of the year here because we’ve had. At this point, the month of November was really good. We might wind up with an excess in equities and some areas we might want to add some money too, as we roll into 2021.

Jason Newcomer: Yeah, that’s right. Especially the things that have been the hottest, most recently, the small cap stocks. I think it’s been a prudent idea that if you were rebalancing your portfolio back while the market was down in March and April, you aren’t done yet. It’s a never-ending process.

You need to be going through your portfolio regularly and looking at opportunities and deciding when enough is enough, and when do I need to start selling off some of those positions.

S&P 500 Versus Small Caps 

S& P 500 Versus Small Cap Stocks November 2020

Figure 1 | Source: Y Charts Small Cap Stocks vs S&P 500 March to December 2020

Dean Barber: I’m going to share one chart here, Jason, that I think is critical. I’m going to go to Figure 1. The Russell 2000 is in gold representing small caps, and the S&P 500 is the purple line. 

You did this, right? You did this in the portfolios that held small cap stocks. At a time when people would’ve thought, “Why would I want to put more money in small cap stocks?” Small saps were more beaten up, we rebalanced into more small caps at the bottom, and they’re now up 83.21% coming off of the March lows while the S&P 500 is up 63.77%.

They’re both great off of their lows and seeing good positive returns on a year to date basis. 

S& P 500 Versus Small Cap Stocks Year-to-Date

SmallCap vs SP 500 YTD

Figure 2 | Source: Y Charts Small Cap Stocks vs S&P 500 Year to Date

But check out Figure 2, even after that fantastic run-up from the lows. The small caps are still trailing the S&P 500 by almost 4% year to date. So, the question is, do those small cap stocks still have some room to run after this massive run-up that we saw in November?

Jason Newcomer: It’s very possible that they do, and even if their future earnings outlook is just as bright, or maybe even more bright than, say, the S&P 500, it’s still probably proved that after such a massive run-up that you just showed on that previous slide, you start to take some of those gains at least and move those back into the funds, maybe a bond fund, or so. 

If that was your source of liquidity to make the purchase in March and April, start to restock on that purchase. 

Another Market Decline Will Come

 at some point in time, we’re going to see another decline in the market, whether it’s because we’ve run too far too fast or something totally unforeseen. As you said, these things are just impossible to predict.

See You Again in 2021

Dean Barber: All right. Well, I guess there are a few more days left in 2020. We’ll be joining you again in 2021. I’m Dean Barber, along with Jason Newcomer, Modern Wealth Management. 

We wish all of you a very Merry Christmas, happy holiday season, and hope you get an opportunity to spend time with friends and family. We wish you all to stay very healthy, stay safe, and keep in mind that we’re here for you. 

If you want to discuss your portfolios, or the impact of recent activities on your portfolios, and whether there are adjustments we can make, we’re here for you. Schedule a complimentary consultation today by clicking here. 

Thanks, Jason.

Jason Newcomer: Thanks, Dean.

Dean Barber Founder & CEO

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