Record Highs Far and Wide - Adviser Investments

Record Highs Far and Wide

January 4, 2021

Please note: This update was prepared on Thursday, December 31, 2020, before the market’s close.

Stocks continued to rally to new highs in the year’s final week, as traders overlooked record COVID-19 hospitalizations, slower-than-expected vaccine distribution and a sluggish job market recovery. The Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite tallied a combined 100 record high closes in 2020. Meanwhile, increased speculation in the fourth quarter also led to the highest-ever levels for margin debt, bitcoin and initial public offerings (IPOs).

Chalk up much of the recent optimism to the fact that vaccines are here (slow rollout aside), continued monetary support from the Federal Reserve and fiscal relief legislation that went into effect this week, which included $600 direct deposits that began to hit Americans’ bank accounts Tuesday. In our view, the relief package is a good step, but we expect more fighting over additional stimulus on Capitol Hill leading up to Inauguration Day on January 20 (and perhaps beyond).

Heading into 2020’s final day of trading, on a total return basis, the Dow Jones Industrial Average is up 9.0% for the year, while the broader S&P 500 has gained 17.6%. The MSCI EAFE index, a measure of developed international stock markets, has returned 8.5%. As of Wednesday, the Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.13%, down from 2.31% at the end of 2019. The U.S. bond market has returned 7.4% this year.

Wall Street Sees Heightened Speculation…

Have investors gone from bullish to euphoric? Let’s be clear: As we look ahead, the market drivers of earnings and interest rates remain positive tailwinds for stocks going into 2021. But we are closely watching for signs of risky speculation.

Margin debt—when an investor borrows to buy securities using existing holdings as collateral rather than paying cash—is running high, at a record $722.1 billion. Trading on margin feels fairly safe when stocks are rising. The problem comes when stocks fall and the borrower has to find cash or sell stocks to cover their debt, triggering a potentially snowballing sell-off in the broader market.

The absolute level of margin debt on its own isn’t a worry—it tends to rise and fall along with the market, and with the market reaching new highs, you’d expect margin debt to go up as well. But the rate at which margin debt has grown over the past year is a warning sign. Big increases in the use of margin, like we’re seeing today, have presaged two of the last three bear markets, the bursting of the dot-com bubble in 2000 and the Great Recession of 2008. (The 2020 bear market, precipitated by the coronavirus pandemic, doesn’t fit the pattern.)

Another form of speculation, in our view, is bitcoin, which continues its stratospheric late-2020 climb, building on its proponents’ claims that it’s “the new gold.” As we went to print, the preeminent cryptocurrency was just under $29,000, more than 300% higher than where it ended 2019. The rally has been driven by institutions buying bitcoin as a potential hedge against inflation and the possibility it may become a broadly accepted payment system.

Coinbase, the country’s largest crypto exchange, eager to capitalize on the surge in popularity of the volatile e-currency, filed for an IPO of its stock earlier this month. We’d caution investors to look back to 2017, when bitcoin skyrocketed to $19,783 per coin before plummeting 84% to $3,122 in 2018 and entering a prolonged slump. We think bitcoin looks more like fool’s gold—buyer beware.

…and SPACulation

Speaking of IPOs, the IPO market went into hyperdrive in the fourth quarter, with $67.3 billion raised by companies going public, pushing the total for 2020 to a record $167.2 billion. It’s been 20 years since we’ve seen anything approaching that number—$108 billion in 1999 and $106 billion in 2000.

What’s different this time from those tech-bubble highs is the advent of special-purpose acquisition companies (SPACs), shell companies that raise cash in an IPO and use that money to buy a private company. Through this purchase, the private company becomes a public one without having to endure the long, detailed and often-fraught traditional IPO process.

Sometimes called “blank-check companies” because you don’t know what type of investment will emerge from the empty shell, SPACs have no real earnings or business; the financial metrics are hidden from investors until a deal is completed. Sure, start-ups and their financiers can avoid the scrutiny of their balance sheets that comes with a conventional IPO, but the unknowns involved make them a risky bet for most investors.

SPACs accounted for nearly half of the entire IPO market this year, totaling almost six times what they did in 2019. We’re not sure how these will play out going forward, but buying early is a total gamble.

Robust Shopping for Homes and From Home

The housing market continues to propel the economy. Home sales reached a 14-year high in October, with buyers pushing prices up at the fastest annual rate since March 2014. Ultra-low mortgage rates and buyers relocating from urban areas in search of more comfortable work-from-home living spaces have fueled the housing market’s strong 2020. The low supply of existing houses for sale has left homebuilders scrambling to keep up, given a shortage of land to build on.

While plenty of people have been shopping for real estate, they’ve also been increasingly buying goods online—analysts say that e-commerce experienced more than two years of growth in 2020 alone. All those internet goods need to be packaged before they can be shipped to your door, leading to the tightest market for cardboard producers in more than 25 years. Paper packaging hit record levels every month between June and October, and mills continue to run at full capacity, with some capping orders and farming out work to contractors.

Thankfully, the sales growth (and subsequent higher paper prices) has spurred online retailers to improve packaging sizing and efficiency. As people have adapted to shopping online, they’ve also gotten much better about recycling—in 1993, about 50% of cardboard boxes were recycled; in 2019, that figure stood at 92%.

Amid the tragedy of millions of jobs lost to the pandemic, adaptive companies created a lot of new jobs and increased convenience for consumers.

Podcast: The 7 Habits of Highly Effective Investors

New Year’s resolutions often turn out to be lofty promises we make to ourselves and have a hard time keeping. But break those big pledges down into smaller, repeatable habits and you are far more likely to make them part of your year-round routine.

If you’ve resolved to get your portfolio in shape for 2021, Adviser Investments Vice President Rick Winters and Senior Financial Planner Andrew Busa are here to help. In the year’s final episode of The Adviser You Can Talk To Podcast, they lay out seven steps for investors to consider as we close the books on 2020—and they are equally applicable throughout the year.

In this lively conversation, Rick and Andrew explain:

  • What do we mean by “rebalancing a portfolio?” And is it the right move? (Not always)
  • The importance of knowing when mutual funds pay out distributions
  • Why to be proactive about “tax-loss harvesting”
  • Different strategies for taxable accounts and tax-preferred retirement accounts like 401(k)s and IRAs
  • … and much more

To find out more about effective portfolio management and to hear our financial planning professionals’ money-saving tips, click to listen now!

Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Wednesday and our current tactical strategy allocations.

Dividend Income

No trades this week. 

AIQ Tactical Global Growth 

Sold Invesco Dynamic Leisure & Entertainment ETF (PEJ). Bought Amplify Online Retail ETF (IBUY).

AIQ Tactical Defensive Growth

No trades this week.

AIQ Tactical High Income

No trades this week.

AIQ Tactical Multi-Asset

Sold Fidelity High Yield Factor ETF (FDHY). Bought VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL).

Adviser Investments’ Market Takeaways

We took a break from our Market Takeaways video segments this week, but we’ll be back with more in 2021—see you then!

Looking Ahead

Our offices (and the markets) are closed tomorrow for New Year’s Day. We’ll be back at our desks on Monday morning ready to help you.

We ring in 2021 with a raft of useful information coming next week, including reads on manufacturing, the service sector, construction spending, vehicle sales, jobs (including the December unemployment rate) and consumer credit, as well as the minutes from the Federal Reserve’s final 2020 confab.

Given the economic and epidemiological challenges, investors have benefited from a remarkable year. Still, we won’t be sorry to bid farewell to 2020. From all of us at Adviser Investments to you and your loved ones, we wish you a happy, healthy and bright new year!

As always, you can visit for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser Investments is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit or call 800-492-6868.

Please note: This update was prepared on Thursday, December 31, 2020, before the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. Further, the securities listed above are not selected for listing based on their investment performance; thus it should not be assumed that any of the securities listed above were profitable or will be profitable, nor should it be assumed that future recommendations will be profitable. Clients and prospective clients should only make judgements about a strategy’s performance after reviewing the strategy’s composite performance information. There is no assurance that each security listed above will remain in the strategy’s portfolio by the time you have received or read this email. Securities are listed for informational purposes and are not intended as recommendations. Existing investor accounts may not participate in all transactions listed above due to each account’s particular circumstances.

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