New Year, Same Discipline

INVESTMENT COMMITTEE COMMENTARY JANUARY 2021

After a strong fourth quarter, market performance was more muted in January. Most broad equity market indexes were down slightly. For the month, the S&P 500 dropped 1.0% while U.S. mid-cap stocks fell 0.3%. Foreign developed equities declined 1.1% while emerging market equities gained 3.1%. U.S. and foreign REITs were down 0.1% and 1.3%, respectively.

Fixed income indexes had mixed performance in January. The Bloomberg U.S. Aggregate Bond Index fell 0.7%. However, municipal bonds and U.S. TIPS gained 0.6% and 0.3%, respectively. High yield bonds were up 0.3%.

Trading, Shocks and Speculation

Over the years, stock trading has become accessible to just about anyone who wants to invest. The cost to trade stocks has fallen dramatically, information is readily available on the internet, and technology provides the infrastructure to provide for timely execution of security transactions. Occasionally, we see disruptions and panics in the markets. Many remember the flash crash of August 24, 2015. During that time, the markets had been relatively tranquil but fears about economic conditions in China sent stocks and exchange traded funds (ETFs) plummeting in the first hour of trading. A SEC report regarding this matter found that stock trading mechanisms designed to hedge losses may have contributed to the crash. 19% of ETFs fell by over 20% on that day as they traded well below the value of the basket of underlying stocks making up the ETFs. While this situation was temporary and markets quickly normalized, investors were asking the question, “are we safe?”.

At the end of last month, the markets experienced another episode of market disruption. Market volatility came from a handful of low priced and thinly traded stocks, most notably GameStop. These stocks skyrocketed in value at the end of January, a significant disconnect from what many considered weak company fundamentals. The frenzied trading ultimately caused Robinhood and other brokers to implement trading restrictions on the stocks. These restrictions were controversial and the facts of what happened are still being sorted out. It appears a multitude of individual investors combined to buy GameStop and the other stocks. These trades contrasted with other institutional investors and hedge funds who were shorting the stocks, anticipating the stocks would fall in value. The activity in these stocks represents only a tiny portion of global financial market activity. Yet, billions of dollars were made or lost in the trading hysteria. While not unique to history, this episode has drawn the attention of SEC regulators, politicians, and news organizations.

The above illustrates that the U.S. markets, the largest and most liquid in the world, can still be subject to disruptions and unusual market volatility. It also illustrates the difference between speculation and investing. Speculators seek abnormally high short-term returns but often with substantially higher risk. Alternatively, JMG recommends investing with discipline, seeking to achieve long-term returns to meet client financial goals while also managing risk. JMG believes in diversification and a consistent investment approach. When speculators ramp up the risks and get the attention of the news media, we believe it is wise to avoid such investments.

If you have any questions, please contact your JMG advisor.

Important Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this writing, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this writing serves as the receipt of, or as a substitute for, personalized investment advice from JMG Financial Group, Ltd. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. JMG is neither a law firm nor a certified public accounting firm and no portion of the content provided in this writing should be construed as legal or accounting advice. A copy of JMG’s current written disclosure statement discussing advisory services and fees is available for review upon request.

To the extent provided in this writing, historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices.