Lowes Magazine 117

DOUG’S DIGEST

A market of two halves

IN THE LAST EDITION I DISCUSSED HOW THE US stock market had significantly outperformed the UK during the pandemic but showed how this was very much driven by a handful of technology stocks. When broken down into sectors the performance was much more mixed with definite winners and losers over the year to that date. The Internet Retail and Home Improvement Retail sectors were the clear winners as people were unable to go out to the shops on the high street to buy things, and also found themselves at home with a lot of time on their hands. By contrast, the Energy sector and those investing in office space fared badly as people travelled less and found themselves working from home (see top two charts right). The point at the time was it was better to have a diversified portfolio not reliant on one particular country or sector as trends like these can quickly change. As if to prove this point the markets did just that, so I want to take the opportunity to update the information from the last magazine to show why we think diversification is so important. At the end of October, we received the first announcements of successful Covid-19 vaccine trials, with incredible effectiveness figures. This gave people hope at last that things may eventually be able to return to some sort of normality, and the fortunes of the different sectors mentioned reversed. Not as clear cut as during the first three quarters of the year, but to the right we show the chart produced in the last edition showing the performance to the end of September, and then a second chart showing the performance since then, with the Energy sector going from the big loser to the real big winner. This reversal of fortunes is also shown in the third chart prepared by Alliance Bernstein, which shows the returns made by five of the biggest technology stocks during the first three quarters of 2020 compared to the rest of the S&P 500 constituents. In the last quarter, the tech stocks went from a 50.70% gain in January to September to a 0.8% loss. The other 495 companies, however, went from a 1% loss to a 10.4% gain as a returning confidence led to a broader recovery. This reversal of fortunes was also seen on a country level. From the start of 2020 to the end of September, the S&P 500 was up 7.73% in sterling terms, whilst the FTSE 100 was down 20.21% over the same period. From the end of September to the time of writing however, the FTSE 100 has risen 15.76%, compared to 7.74% for the S&P 500. Whilst we expected this reversal to happen at some point, we were taken as much by surprise as many others by the suddenness of it and the marked difference we saw. Which brings us back to our message that diversification is key. It showed just how quickly sentiment can move and how the fortunes of one region or one company can change. If all your investments are pointing in the same direction when the winds of fortune change like this, what had previously been big gains can sometimes turn into big losses before there is time to react. For those who are more risk averse and cannot stomach these kinds of movement, diversification helps temper the rises and falls with different sections of your portfolio moving to the front at different times.

S&P 500 January 2020 to September 2020 Internet retail wins out and energy lags

100 80 60 40 20 0

% return

-20 -40 -60 -80 Dec 19

Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Jul 20 Aug 20 Sep 20

S&P 500 S&P 500 Home Improvement S&P 500 Energy

S&P 500 Internet Retail S&P 500 Office REITs

Source: FE Analytics

S&P 500 October 2020 to 13 January 2021 The picture reverses with energy on top

60

50

40

30

20

% return

10

0

-10

Oct 20

Nov 20

Dec 20

S&P 500 S&P 500 Home Improvement S&P 500 Energy

S&P 500 Internet Retail S&P 500 Office REITs

Source: FE Analytics

Composition of S&P 500 Performance in 2020

60%

50.70% 49.90%

50%

40%

30%

18.40%

20%

10.40% 9.90%

9.70% 7.90%

10%

-0.80%

-1.00%

0%

Jan- Aug

Sept- Dec

Jan- Dec

Jan- Aug

Sept- Dec

Jan- Dec

Jan- Aug

Sept- Dec

Jan- Dec

-10%

S&P 500 Index

Microsoft, Apple, Amazon, Alphabet, Facebook

All Other Index Constituents

Lowes Financial Management is authorised and regulated by the Financial Conduct Authority. Visit: www.Lowes.co.uk | Call: 0191 281 8811 | Email: enquiry@Lowes.co.uk