Market Pulse: 4th quarter review, part II |

Market Pulse: 4th quarter review, part II

For a large part of last year, the five largest stocks in the S&P 500 by market capitalization — Apple, Microsoft, Amazon, Facebook and Alphabet/Google — massively outperformed the other 495 stocks. In early September, those five stocks represented nearly 25 percent of the S&P 500, so their hefty outperformance lifted the overall index.

David Vomund

In the fourth quarter market participation increased. Small-cap stocks as measured by the Russell 2000 doubled the Nasdaq’s gain. Investors saw better days and an improving economy ahead.

On the interest rate front, Fed chief Powell recently reiterated his plan to buy bonds and mortgages well into the future, at least until inflation rises above 2 percent and the expected GDP growth spurt appears. With interest rates at rock-bottom levels this continues to be a challenging time for investors seeking income. Even after last week’s slight rise in rates, most investment-grade preferreds trade above par value with little room to move higher.

An accelerating post-Covid economy represents the largest risk to fixed-income securities. That, plus massive Treasury borrowing, would put upward pressure on interest rates. Even a retreat to their par value would offset a good part of a year’s dividend payments. From a valuation standpoint, dividend-paying stocks are more attractive than bonds. I still like some high yielding preferreds, though.

I watch for signs of excess in the stock and credit markets. We are seeing a growing fascination with the riskiest stocks including new issues and special purpose acquisition companies (SPACs) that have yet to decide what business they’d like to be in. People are buying them anyway and IPOs of all kinds. That is not a good sign. We saw such buying leading up to the market peak in 2000 and at times in the 1960s and ’70s. In 1999 it was the dot-com mania. In the 1980s it was energy. Now it’s technology and electric vehicle plays. Many will not survive. Reason for concern, if nothing else.

Whenever the market is trading at or near all-time highs, it’s important to assess the risks. We are optimistic about getting to the other side of the Covid-19 chasm, but there are likely to remain some broken planks on the bridge to get there. Few expect interest rates to increase much, which is why an unexpected rise might be the market’s greatest risk. We’ll keep close watch.

David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.

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