“Those who vote decide nothing. Those who count the vote decide everything.”

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Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA

Newsletter

 

January 4, 2021 – DJIA =30,606 – S&P 500 =3,756 – Nasdaq = 12,888

“Those who vote decide nothing. Those who count the vote decide everything.”

 

Although the above quote is associated with Joseph Stalin, there is debate whether he is the actual source.  Regardless, it appropriately describes the 2020 U. S. Presidential election and is emblematic of our divided country.

The right to choose our government representatives fairly and freely is a core component of the United States.  From local office to federal positions, the right to vote gives the individual an equal say in our country’s direction and leadership.   And despite some nasty and messy examples, our elections have been the envy of the world

This latest election was different.  Unconventional campaigns, censorship and biased news reporting, and newly instituted tabulation methods intersected during 2020.  These developments clearly damaged the election’s transparency which resulted in voter doubt.  This loss of confidence further widened the country’s divide.

Throughout the year there was hope that after the presidential election, the social ill will would recede.  This kumbaya moment would be a period of healing and then a return to our pre-2020 existence. Unfortunately, the election has inflicted more and deeper wounds which will not easily heal.

The soldiers and battle lines of this civil war are different from the conventional conservative Republicans vs. the liberal Democrats.  The new battleground cuts across different sectors of our culture which brings together diverse elements into the opposing groups.  Populists squaring off against globalists, the middle class opposing the elites, and the Davos crowd vs. the deplorables.  And as the war matures, there will likely be other curious alliances and divisions.

While the election has inflamed the emotions of the fight, the core of the conflict centers on the balance between individual freedoms and providing for the common good.  This struggle is as old as mankind.  This war has countless fronts and battles, and both sides have dug in.  It is difficult to see a path to unifying the United States citizens in 2021.

This social division will ultimately alter our economic wellbeing.  To many, it is one of the great mysteries of 2020 that the financial markets performed as they did.  Not only did they recover from March’s air pocket, but they functioned well in a year with a pandemic, economic shutdowns, riots and protests, and the turmoil surrounding the election.

The stock market had amazing returns given this backdrop.  Here are the 2020 performance numbers for the major averages.

 

 

An interesting 2020 stock market development was the influence of the individual investor.  As a result of working from home (or just at home and not working), stock trading became a favorite pastime.  In addition to online trading, a stock trading mobile app called Robinhood became the preferred platform.

Robinhood offered $0 commissions, the ability to purchase partial shares, and option trading.  It became so popular that websites began tracking and reporting on the most widely held positions.  Unfortunately, education and experience weren’t required.  One young investor mistakenly thought he lost $700,000 in his trading account and, sadly, took his life.

Looking at the other markets, the bond market provided good returns.  The Barclay’s Aggregate Index (a composite that tries to capture the treasury, mortgage, and corporate bond markets) had a total return (price and income) of 7.51%.

The yield on the 10-year Treasury bond began the year around 1.9% and ended at 0.91%.  This yield traded below 40 basis points (0.40%) during the March turmoil which an all-time low for this security.  Of course, global central bank intervention played a huge role in holding interest rates low to help the economy.  This could be a place to watch in 2021 as interest rates have been moving higher.  The 10-year yield traded around 0.50% in August but has been steadily rising since then.

The U.S. dollar declined from its March peak and lost 7.14% in 2020.  As measured by the U.S. Dollar Index (symbol = DXY), it reached 103 as stocks plunged in March. It gradually declined the rest of the year and closed 2020 at 89.68.  A falling dollar can coincide with rising inflation as the cost of imports go up.  Again, this is a trend that could become a problem in 2021 especially if it signals that the international community is losing trust in the U.S.

Commodities often trade opposite the dollar and it happened in 2020.  The Dow Jones Commodity index rose 13.9%.  Gold sold off in the 4th quarter but was up almost 25% for the year.  Crude oil did not trade with other commodities and declined 20.5%.  Oil plunged during the start of the shutdown and traded at a negative price in the futures market in April (Yes – the sellers paid the buyers to take the contract for oil).  Since then, prices have been rising and the price approached $50 per barrel at the end of the year.

Bitcoin and crypto currencies returned the spotlight in the second half of the year.  Bitcoin fell to $5,000 in March but finished the year over $29,000.  The trade, like other currencies, has a weak dollar element so the falling DXY has been a tailwind.  However, there is a perception that it could become a stronger store of value against inflation.  If that proofs to be true, Bitcoin and the crypto currencies will be a big story in 2021.

2020 will be remembered as a year full of calamities.  It will be a defining point in history like the Great Depression or World War II.  While many expect a much different and brighter 2021, regrettably, many of the same challenges continue to confront us.  There is no guarantee that 2020 was an inflection point and 2021 could turn out to be worse.  Nevertheless, our country is resilient and, somehow, we will eventually regain some sort of cultural reconciliation and move forward.  That will be good for everyone including Mr. Market.

“O Little Town of Bethlehem, How Still We See Thee Lie.”

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Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA

Newsletter

December 21, 2020 – DJIA = 30,179 – S&P 500 = 3,709– Nasdaq = 12,755

“O Little Town of Bethlehem, How Still We See Thee Lie.”

 

This year has been one of intersections.  Tectonic and life altering collisions of dire events have changed the world.  The challenges that we are facing will impact our lives for many years.  While there is widespread hope and belief that we return to the lifestyle of pre-pandemic society, this is becoming less likely as time passes.  The unexpected outcome might be that 2021 is worse than 2020

Our turbulent year is ending with another historic intersection and, fortunately, this one doesn’t appear to be a disastrous pit.  The “conjunction” of Jupiter and Saturn in the Earth’s December sky is a different type of intersection and, who knows, it might signal an inflection point for the better.

A planetary conjunction is when two heavenly bodies seemingly meet as seen from Earth.   While the conjunction of our solar system’s two largest planets happens around every 20 years, they rarely pass as close to each other as they will this year.  Also, this year’s occurrence is notable as it is easily seen without a telescope.

This year’s astronomical intersection is being referred to as a “great conjunction” because the planets seldom appear this close to each other.  The orbits of Jupiter and Saturn do regularly intersect as viewed from our planet, but it is not as close or as bright as what is happening now.  The last time Jupiter and Saturn appeared so close and was so visible was March 1226.

Because of their infrequence, some scientists look for historic events surrounding “great conjunctions”.  Johannes Kepler was a 17th century astronomer and mathematician who was a big influence on others such as Isaac Newton.  Kepler researched the possibility of a “great conjunction” being the Star of Bethlehem that guided the Three Wise Men as described in St. Matthew’s Gospel.  He concluded that there was a “great conjunction” around 7 B.C.

In addition to our cosmological excitement, the stock market has also acted celestial.  Stocks had one of their best months ever in November. The Dow Jones Industrial Average recently traded over 30,000 and the Nasdaq Composite has been on a moon ride and is up over 40% in 2020.  All the major averages are in record territory.

These gains contrast with the earthly background of the U.S. economy.  It is a huge contradiction that we have stock market records along with shutdowns and restrictions, high unemployment, and the destruction of small businesses.  However, perception is reality in the financial markets and computer algorithms do not typically look at the fundamental data.  They are more concerned with things like price action which can be a self-fulfilling circle.

Here are the major averages year-to-date performance as of December 18th.

 

The declining value of the U.S. dollar has been a boost to the stock market.  The dollar index (symbol = DXY) is down 7.9% year-to-date.  More importantly, it is down 12.6% since the peak in March.  While a low double digit drop doesn’t seem like a lot, the dollar has a wide-ranging global impact.  It has a much greater force on other economic factors and markets than its absolute movement against other currencies.

The 120-day correlation between the DXY and the S&P 500 has decreased to a negative 88%.  Statistical correlations range between 1 and -1.  A correlation of 1 means that the two factors move together relatively and directionally.  The negative 1 would mean that the factors move in opposite directions.  At -.88, the DXY has clearly helped the stock market.

The factors weighing on the U.S. dollar are many.  The United States is over $27 trillion in debt. Further, there is well over $100 trillion of debt and unfunded liabilities.  While there are other countries in similar or worse fiscal conditions, the global capital markets may be losing confidence in the American situation.  This devaluation of the U.S. dollar is helping financial assets – for the time being.

Another shining star in the financial markets is Bitcoin.  The crypto currency is up 121% in the 4th quarter and 228% year-to-date.  Again, this trade has an anti-dollar component, so the dollar’s slide has supported Bitcoin.  Here is a chart Bitcoin’s price for 2020’s 4th quarter.

 

 

Confidence in the crypto currencies is increasing for some of the same reasons that the dollar is falling.  Out of control government spending, record deficits, and no plan to address these issues.  Nothing travels in a straight line, but if the dollar falls further, stocks and Bitcoin could keep rising even as the societal shutdown continues.

In a year full of historic developments, our solar system reminds us there is consistency of heavenly cycles.  This is in sharp contrast to the chaos that has overcome our lives.  If this “great conjunction” marks a change in our world, hopefully it brings a shift to healing, peace and an honest, truthful effort of moving humanity closer to a heavenly nature.

Merry Christmas, Happy Holidays, and Best Wishes in the New Year.