December Melt Up

December Melt Up

by Zach Marsh on Dec 18, 2020

Stock indices were up again this week, with small cap and technology stocks leading the way. The large-cap S&P 500 index was up 1.2%, bringing its December gain to 2.4%. More impressive has been the return of the Russell 2000 small-cap index. IWM, the ETF which tracks the performance of the Russell 2000, was up 2.63% this week and is now up over 7.8% for the month. This month’s gains for the Russell now gives it a higher year to date return than the S&P 500, a prospect which seemed preposterous just a couple months ago. Since the end of October the IWM is up over 27.5%! As a writer I hate the use of exclamation points, but that seeing the 7-week return for small caps is startling.

Last week I posited that if we are not experiencing Irrational Exuberance, we are at least experiencing elevated exuberance. Every time I turn on CNBC there seems to be another analyst on trying to rationalize the current market price ramp. From a valuation standpoint there can be no real justification, but to borrow a sports phrase, “That’s why you play the game.” If markets were as simple as adding numbers on a ledger and coming up with a rational price, then there really would be no need for a marketplace. The thing about pricing “bubbles’ is that they can go on much longer than you can imagine, climb higher than you think, and ultimately pop and decline further than you fear.

Even if I were to declare we are in a bubble, my declaration would not be intended to be construed that the end of the rally is nigh. With a couple weeks left in the year I would expect us to see much of the same price action we’ve seen the last couple months. January, and Q1 2021 should provide interesting markets. With a potential for violent price action one direction or another.

This will be our last note before Christmas and David and I would like to wish all of you a Merry Christmas and hope that you are able to spend surrounded by loved ones.

Thanks for reading,

Zach and Dave  






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