By: Costas Bocelli — January 7, 2021
Investing in 2021 Starts Here
Happy New Year!
Shortened visits notwithstanding, I did get to spend the holidays with some members of my family.
My hope is that you did too!
When we visited my wife’s side of the family, the dinner “small talk” centered around the elections, COVID and of course, the financial markets.
As usual, Uncle Ronnie prodded me for my latest and greatest investing ideas.
And as usual I told him the same thing I always say: "Are you a paid-up subscriber to one of my services? Because then you’d know! Besides, I’m here to eat turkey (with Aunt Vicky’s cornbread dressing) not to “talk turkey” (about the stock market)."
That always brings out a chuckle from good ol’ Uncle Ronnie.
After we needle each other over drinks, I am obligated to share some financial insights with the family, even if they are "the in-laws”.
I mean, that’s the least I could do after they fed me a scrumptious southern- cooked holiday meal.
“So, yankee, where’s the best place to invest my money in the New Year?”
(Uncle Ronnie has mellowed in recent years; he used to call me “damn yankee”. But now that we’ve relocated from the Northeast to the Coastal Carolina's six years ago, he’s become more endearing towards me then when were together.)
I told him the best investments looking ahead are often the best ones looking behind.
At least that’s a good starting place.
Then I whipped out my smartphone and showed him this graphic…
(Click any image to enlarge)
This is the performance of the S&P 500 and the 11 broad sectors that comprise the index for 2020.
As you can see, the S&P 500 generated a +16.26% return. That’s pretty good.
But if you instead invested in the Technology and Consumer Discretionary sectors, you’d done even better.
Those two sectors outperformed the benchmark, generating +42% and +28% returns, the best gains among the broad sectors.
Energy, Financials, Real Estate and Utilities happened to generate negative returns over the past year.
So the best advice I offered Uncle Ronnie was to invest in things that have been working. Those are the ones that are likely to outperform looking ahead.
Of course, things will eventually change. And when they do, then you can adjust.
So heading into the New Year, Technology and Consumer Discretionary are the two strongest broad sectors in terms of relative strength.
And then I told him that the Industrials is a sector that is gaining a significant amount of strength as compared to the others (XLI +8.69%), even though, overall, the sector underperformed the benchmark in 2020.
That’s an example of adjusting with the changing trends.
So just like that, Uncle Ronnie has a good starting point to look for investing ideas to kick-off the New Year.
Momentum investing is a powerful factor.
And when it’s working, like it has in 2019 and 2020, it can help grow your wealth at a faster pace than seen by the average investor.
So it’s a highly effective investment strategy. You stick with what’s working until price tells you otherwise.
December is typically a strong month for stocks. And Santa Claus delivered the goods this past December as the S&P 500 gained +3.6%.
That's no surprise.
Even my Uncle Ronnie knows about seasonal strength around this time of the year.
But then I went on to tell him that the stock market did something extremely rare over the last two months of the year -- something that has only happened four other times since 1957.
And each time this rare feat happened -- four-out-of-four times -- the stock market generated a positive return in the month of January and throughout that particular year.
The rare feat I'm alluding to was the S&P 500's gaining 10% or more in the final two months of the year.
It happened in 1962 (+12.2%)…
It happened in 1970 (+11.3%)…
It happened in 1985 (+12.0%)…
It happened in 1998 (+12.2%)…
And (drum roll please)… it just happened in 2020 (+14.8%).
In those previous four instances, the following year was not only positive, but generated an above average return. The average annual gain was 19.2%.
True, we're dealing with a small sample size here -- four other instances in 63 years.
But those returns I just showed you? Those are the stone cold facts.
Now just imagine that you’re invested in the strongest sectors of the stock market, the ones that drive those strong returns.
That is how you can build wealth at a faster pace.
For Uncle Ronnie, that means an opportunity to fund another addition to his classic car collection.
(Here's Uncle Ronnie, Aunt Vicky, my son Blake and a couple of his cousins)
At the end of our holiday visit I shared with Uncle Ronnie three strong stocks from the three strongest sectors as investment ideas to kick-off the New Year.
In the Technology sector, I told him to take a look at Cadence Design System (CDNS).
In the Consumer Discretionary sector, I suggested Autonation (AN).
And in the Industrials sector, it was Deere & Co. (DE).
I know Uncle Ronnie was appreciative, and I think he really loved the DE idea.
We drove past three Deere tractors when we left his family's farm.
Wishing you and your family a happy, healthy and prosperous New Year!