Vinny Gambini (played by Joe Pesci): Lisa, I don’t need this. I swear to God, I do not need this right now, okay?
I’ve got a judge that’s just aching to throw me in jail.
An idiot who wants to fight me for two hundred dollars.
Giant loud whistles.
I ain’t slept in five days.
I got no money
A dress code problem
AND a little murder case which, in the balance, holds the lives of two innocent kids.
Not to mention your [taps his foot] BIOLOGICAL CLOCK – my career, your life, our marriage, and let me see, what else can we pile on?
Is there any more S&*% we can pile on to the top of the outcome of this case? Is it possible?
Vinny's epic rant (you can watch the full scene here) is one of my all-time favorite movie scenes. Vintage Joe Pesci. It also runs parallel to the weirdness of 2020.
Global Pandemic, social unrest, Presidential election year, regional fires, endless quarantine, digital learning, is there anymore *&%$ we can pile on?
I hope not. Here's to coasting into year-end without another major event. Boring would be beautiful. Weirdness aside, here are some observations from the year that will go down in history books.
Sub-Zero Oil Prices
This would have been a crisis in itself, but it was hardly talked about during the COVID sell-off. At expiration of the May 2020 futures contract, one had to pay someone to take delivery of a barrel of oil! Too much oil being produced, not enough storage capacity, and demand that fell off a cliff.
Source: Deutsche Bank, Global Financial Data
The above chart shows the cost of a barrel of oil (adjusted for inflation) since 1870. The oil market was broken, blowing up historical pricing & trading models. This was unprecedented, even for historically volatile black gold.
Every Presidential election feels like the most important ever. 2020 is no exception. Many investors believe the election outcome will have a dramatic impact on financial markets. We've looked high and low for evidence to support this thesis...
Source: Bespoke Investment Group
The above chart shows S&P 500 pre and post-election since WWII. The “n” next to the color lines (top left of graph) represent the number of instances of each outcome. There’s not much evidence to suggest the market will do something extreme after the election, but it’s also 2020.
Markets Can Make Even the Brightest Look Inept
Ray Dalio, regarded as one of the best investors of his generation, has seen massive outflows from his hedge fund. His flagship strategy, Pure Alpha II, is down -18.6% through August 2020.
Warren Buffett, revered by some as the best investor who ever lived, is trailing the S&P 500 by ~11.50% (as of 9/30/2020).
Stanley Drunkenmiller, a longtime hedge fund manager, said he has returned just 3% during the market’s 40% rally since the S&P 500′s springtime bottom (comment was made June 2020). Drunkenmiller went on to say the experience was humbling and he was caught off-guard by the ferocious market comeback fueled by the Fed's swift accommodation.
Did these world-class investors suddenly become stupid? Of course not. Investing is hard. Things change quickly. There's little logic for what's happened in financial markets this year. Sometimes, staying in the game and not making a huge mistake is winning.
Resiliency of the U.S. Stock Market
It's actually hard to find someone who is optimistic about U.S. markets going forward. However, it's quite easy to find someone predicting a huge crash or the end of civilization. Broad investor sentiment backs this up...
The above graph shows AAII Bullish Sentiment (blue) vs. the S&P 500, going back to 1988. In recent years, depressed bullish sentiment (meaning investors aren't very optimistic), has been a nice contrarian indicator for higher stock prices.
U.S. Tech Benefited from the Pandemic
We have been locked inside ordering stuff on AMZN, communicating with friends via FB and Instagram, watching Netflix, and Googling "what is COVID?" on our new iPhones.
Call it a happy accident, but I would be hard pressed to believe the Technology sector (NASDAQ) would be up ~30% (as of 9/30/20) without COVID.
Source: Bespoke Investment Group
The above graphic shows the five largest stocks now (left) vs. 2010 (right). Amazon is worth more than the entire lineup of largest companies back in 2010.
U.S. Treasuries Crush
Bonds as a broad asset class have quietly turned in another solid year. U.S. Treasuries, especially long-dated maturities, have been a steamroller. Shunned by investors hyper focused on low-yields, these bonds have had the last laugh.
The above graph shows various Treasury ETFs, short-term (purple), intermediate (orange), and long-term (blue). Low yields be damned, an allocation to U.S. Treasuries has been a winning trade. We concede it will be difficult to replicate going forward, given the current level of bond yields.
Using your best Vinny impression, is there anything else you would pile on for 2020? Let us know by replying to the Sunday Coffee Reads email or social media.
*My Cousin Vinny graphic sourced by Metacritic.com