A Tale of Two Drawdowns

vintage looking old books on shelf - a tale of two cities from charles dickens. photo has taken from izmir/turkey.

Past performance is no guarantee of future results.  Trend signals are proprietary research of Fortunatus Investments, LLC, a Registered Investment Advisor with the Securities and Exchange Commission (SEC). Reference to registration does not imply any particular level of qualification or skill.  Prior to June 2014, Fortunatus Investments was a wholly owned subsidiary of Executive Wealth Management, LLC and they continue to share common ownership and control. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation.  One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.

Quote of the Week

For 2021, the bar for better living is set low. By summer, if I’m not mixing my own hand sanitizer while hoping that the lightning wildfires scare off the murder hornets, it will count as a year-over-year improvement.

Barron’s financial columnist Jack Hough detailing his goals for personal development this year.

Market News

Pardon the excursion into hyperbole, but 2020 was an unusual year. Several seemingly solid ideas about investing faltered over the course of the year. Let’s briefly look at one example. Companies with similar business activities are grouped into industrial sectors by the financial markets. Under different types of economic conditions, certain sectors traditionally perform well, while others struggle. Two sectors consistently used to illustrate this dissimilar performance are the consumer staples sector and the consumer discretionary sector.  Companies in the consumer staples sector either produce or sell products that people buy on a regular basis, including food and personal care items. The two largest companies in the S&P 500 Consumer Staples sector are Procter & Gamble (they produce the goods) and Walmart (they sell the goods). The consumer discretionary sector includes companies that deal with the products not considered staples; these businesses cater to consumer wants not needs.  Restaurants, automobile manufacturers, and entertainment providers are included in this grouping. 

One common idea about sector trends you will see in the financial media is that consumer staples stocks will outperform consumer discretionary stocks during difficult and uncertain economic times. Even under duress, consumers still need to consume the products that provide for their basic needs, and consumer staples companies should continue to generate sales and profits. At the same time, consumers will curtail their purchases of discretionary items until the future looks more certain. During the Great Recession, which officially lasted from December 2007 to June 2009, the consumer staples sector index fund (ticker: XLP) significantly outperformed the consumer discretionary index fund (ticker: XLY), as can be seen in the chart below:

However, in 2020, a year which featured a recession and both extended global lockdowns and continued unemployment, the same consumer discretionary sector fund outgained the consumer staples sector fund by a large margin (as can be seen in the chart below). How did this happen?  Well, it has a lot to do with the largest company in the S&P 500 Consumer Discretionary Index – Amazon.com, Inc.  The e-commerce behemoth had a total return of 76% in 2020, and it makes up over 21% of the index. Last year, Amazon didn’t just generate revenue by delivering goods to those sheltered in place, but by also running the largest cloud computing platform (Amazon Web Services) that provided the digital infrastructure that allowed many people to work from home.

With so much business generated during an economically challenging time, should Amazon still be considered a consumer discretionary stock? Possibly not, but  just like other consumer discretionary companies, Amazon should see its revenues pick up as the economic picture improves.  Large, multi-faceted, mega-cap tech companies like Amazon are a challenge to classify according to the old categories; and thus, they present the possibility of distorting even the most well-reasoned investing thesis.

Model Update

On Monday, January 4th, the Fortunatus ETF Opportunity models underwent their monthly relative strength rotations. The US Growth model increased its allocation to small-cap stocks. There were no other changes to the Fortunatus models during the week. All major equity sectors remain in a long-term uptrend, and the Fortunatus Asset Allocation models maintain their overweight position in domestic equities in comparison to international shares. 

Executive Wealth Management (EWM) is a Registered Investment Advisor with the Securities and Exchange Commission. Reference to registration does not imply any particular level of qualification or skill. Investment Advisor Representatives of Executive Wealth Management, LLC offer Investment Advice and Financial Planning Services to customers located within the United States. Brokerage products and services offered through Private Client Services Member FINRA/SIPC. Private Client Services and Executive Wealth Management are unaffiliated entities.  EWM does not offer tax or legal advice. Please do not transmit orders or instructions regarding your accounts by email.  For your protection, EWM does not accept nor act on such instructions. Please speak directly with your representative if you need to give instructions related to your account. If there have been any changes to your personal or financial situation, please contact your Private Wealth Advisor.

Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold

1 Week = closing price on December 31, 2020 to closing price on January 8, 2021

 1 Month = closing price on December 8, 2020 to closing price on January 8, 2021

 3 Month = closing price on October 8, 2020 to closing price on January 8, 2021

 YTD = closing price on December 31, 2020 to closing price on January 8, 2021

All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions as well as any prices indicated are current only as of the date of this report, and are subject to change without notice. Material provided is for information purposes only and should not be used or construed as an offer to sell, or solicitation of an offer to buy nor recommend any security. Any commentaries, articles of other opinions herein are intended to be general in nature and for current interest. Some of the material may be supplied by companies not affiliated with EWM and is not guaranteed for accuracy, timeliness, completeness or usefulness and EWM is not liable or responsible for any content advertising products or services.

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