After a few months of anticipation, President Biden was officially sworn into office on Wednesday at noon. The market greeted him by surging more than 1% and posting yet another all-time high. Over the course of the week, however, a subtle change began to play out under the surface. In contrast to recent months, growth stocks sharply outperformed their value counterparts. S&P 500 growth outperformed S&P 500 value by over 4.5%.1 Since early fall, value has seemingly been on a run as we believe participants began to price in an eventual end to the pandemic spurred by the rapid development of several vaccines. Over that time, we expect boots on the ground companies also got a boost from the promise of more stimulus from the Democrats. A pullback on the value front makes sense from the standpoint that we are now in the sausage-making process. The President and Congress have a lot of work ahead to bring the pandemic to a conclusion.
Our friends at Strategas Research Partners point out that the year after a new President takes over is often volatile. Historically, the month of January is strong, but as Congress gets to work on a new administration's priorities, performance can lag. As details of new proposals are hammered out, participants tend to get cautious. We are getting a taste of this with the more risk-on stocks like financials, materials, and industrials taking a breather. Instead, markets have turned back towards their favorite "defensive" plays. These days that means technology and communications.
Still, it is important to remember that we are nonetheless moving towards a resolution to the pandemic and that the economy has added several trillion dollars of stimulus in just a year's time. This notion remains a powerful catalyst for the equity market and especially the boots on the ground stocks. We continue to believe there will be significant pent-up demand on the other side. That said, we are looking at any pullback in the coming months as a buying opportunity and a chance to get into some of the more cyclical names we may have missed.
In terms of the details, Congress will soon be taking up Biden's proposal for an additional $1.9 Trillion in stimulus. However, Republicans and even a few Democrats are finding this price tag too steep. Either through normal order or budget reconciliation, it is likely that this package will shrink. This is okay because some stimulus is better than no stimulus, but this adds to the idea that markets might have some adjustments to make in the short-term. We continue to have our ear to the ground.
1 Donaldson Capital Management
Preston May, CBE®
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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.