To say 2020 was a year unlike any other is an understatement on several fronts.
But despite the pandemic, election and other news, equities finished the year higher and once again the Real Money Post Industrial Average bested the bulk of the major equity market indexes.
Things looked rather dire in March as the coronavirus took hold, forcing changes in both consumer behavior and company business models. Equities, however, recovered over the summer as economic data and earnings were somewhere between better than expected and not as bad a feared. There were some setbacks as fall set in and Covid case counts surged, but stocks were once again off to the races in early November due to a fresh shot of hopium following positive vaccine developments and the conclusion of the presidential election.
The bulk of the 2020 gains for the Dow Jones industrial average and the S&P 500 came during the fourth quarter, despite the year-end haggling over the pandemic relief bill. The same was true with the small-cap heavy Russell 2000, which climbed roughly 30% in the December quarter, powering its positive yearly return. By comparison, the Nasdaq Composite Index, which closed up more than 40% in 2020, benefited from a number of factors, including the accelerated shift to digital shopping, and work-from-home and learn-from-home trends. Those same drivers and others led the Real Money Post Industrial Average to finish 2020 up 34.7%, once again besting the majority of the market indexes.
While there were some setbacks among RMPIA's constituents in 2020, including Biogen (BIIB) , Amgen (AMGN) , and Walgreens Boots (WBA) , those were more than offset by the impressive gains registered in shares of PayPal (PYPL) , Apple (AAPL) , Adobe Systems (ADBE) , Amazon (AMZN) , and Netflix (NFLX) . All told, roughly 60% of RMPIA's constituents outperformed the S&P 500 during 2020 while roughly 70% bested the Dow Jones Industrial Average.
What's to Come in 2021?
It's great to enjoy the wins when we have them, but as we all know, the stock market is a forward-looking animal and that means not taking too much time to pat ourselves on the back, but rather preparing for what lies ahead. Even as the Covid-19 vaccine is handed out, it will take months to reach herd immunity levels that will foster a rekindling of the economy. Yes, light is at the end of the tunnel, but we continue to see some economic speed bumps -- at least at the outset of the March quarter.
In the coming weeks, President-elect Joe Biden will be sworn into office, and we'll see how smoothly that goes. Fingers crossed that there are few, if any, disruptions, and that Washington can get back to business. Perhaps it will hammer out an infrastructure spending bill that will finally address the nation's crumbling roads, bridges, ports, airports and highways. There is also the ongoing trade issue with China that will need to be addressed, as well as President Biden's own agenda items.
Before Biden takes the Oval Office, two known items that we'll contend with are the CES 2021 tech conference and the start of the December-quarter earnings season. Much like other conferences and trade shows held during the pandemic, CES will be a virtual event. But it will still feature a number of keynotes that will inform us as to what we are likely to expect in the coming year on the technology front.
In recent weeks, we've seen GDP expectations for the start of 2021 drift lower as the pandemic has once again presented a headwind to the economy and efforts to contain it have expanded. We're also learning of a new strain of Covid-19 that "spreads more efficiently" but "does not seem to evade the protection that's afforded by vaccines that are currently being used," according to Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases. At the same time, the distribution of vaccines in the U.S. has gotten off to a slower-than-expected start. Expectations are that vaccine activity will increase in the coming weeks and we'll be sure to keep tabs on vaccine-related data published on the Centers for Disease Control and Prevention's Covid data tracker website. As the number of the inoculated continues to grow in the coming months, we will get closer to seeing the economy return to normal.
The issue is it will take some time to walk down this path, which to suggests it will be the second half of 2021 before things begin to normalize.
We also continue to think consensus expectations run the risk of an economic and earnings speed bump that we'll hit early in 2021. Supporting that view is the retreat in the Citibank Economic Surprise Index in recent months, and also the slowing growth reported in the HIS Markit December Flash U.S. Composite PMI data. Part of that was due to the fall in new export sales as renewed lockdowns in key export markets dampened foreign demand. All of that is summed up rather well by Chris Williamson, Chief Business Economist at IHS Markit, who said, "... December has seen companies rein in their expectations, given the higher virus case numbers and tougher lockdown stances adopted in some states. Lockdowns in other countries were meanwhile reported to have hit exports. While vaccine developments mean some of the cloud caused by the pandemic should lift as we head through 2021, rising case numbers continue to darken the near-term outlook."
Normally, there tends to be some step down in economic activity from the December quarter to the March one, as consumer spending wanes in comparison to the year-end holiday shopping season. The start of 2021 has a somewhat larger step down in GDP -- to 1.9% during the March quarter vs. the expected 4.1% in the December 2020 quarter, according to data published by The Wall Street Journal's Economic Forecasting Survey. That same survey goes on to forecast gross domestic product of 3.7% for all of 2021, which means its expectation for the other three quarters of 2021 hover around 4.0%.
While recent Covid-19 new cases have waned some in aggregate across the U.S., hot spots remain -- and that has prompted the extension of virus-fighting measures even as a new strain of the virus that spreads more quickly has been found inside the U.S. Similar to what we saw after the Thanksgiving holiday, odds are we will see a post-holiday rise in new case counts in early January. Should this come to pass, in all likelihood it will mean more restrictions that will be a headwind to the economy and corporate earnings.
Earnings Expectations and RMPIA
On the December-quarter earnings front, data from FactSet shows that so far in the quarter, more S&P 500 companies issued positive earnings guidance than average. At this point, more than 80 companies in the index have issued EPS guidance for the December quarter. Of them, roughly 30 issued negative earnings per share guidance and more than 55 issued positive EPS guidance. That puts the percentage of companies issuing positive guidance at more than 65%, well above the five-year average of 33%. This sounds positive, but we have to mention that the total number of companies issuing guidance remains well below the five-year average for the quarter. Here's the thing, despite the above revelations, the consensus expectation for December -- quarter EPS is still a year-over-year decline near 10%.
Digging into the data, we see the S&P sectors that are driving that year-over-year decline for the December quarter.
But again, the stock market is a forward-looking animal, and current expectations call for a 22.7% rebound in S&P 500 EPS during 2021 vs. 2020, as well as a 4.1% increase compared to 2019.
Turning back to RMPIA, consensus EPS forecasts for its constituents call for 26% increase in 2021 following the 13.8% drop in 2020, which infers an almost 9% improvement over the 2019-2021 period.
That's more than double expectations for the S&P 500 and fueled by double-digit EPS over the 2019-2021 period at 20 of its constituents. Leading that charge are Netflix (NFLX) , Qualcomm (QCOM) , Amazon, Nike (NKE) and Facebook (FB) .
The rule of thumb on Wall Street is that quicker EPS growth tends to spur multiple expansion, which is a pretty powerful one-two combination for stock prices and that means 2021 will be another positive year from RMPIA vs. the major market averages.