Markets Close Higher on Penultimate Trading Day of 2020

Pharma investors buy the rumors, sell the news

U.S. equity markets closed higher on the penultimate trading day of the year. The Dow narrowly topped a new closing high behind the strength of Visa (V) and Apple (AAPL), two of its most powerful components. Energy stocks also closed higher as positive vaccine news from AstraZeneca and Oxford University propelled the recovery trade. 

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The EU approved the Brexit deal with the U.K. just before the deadline tomorrow night. That ends a four-year saga of negotiations, but the hard work has really just begun. The U.S. Senate is not likely to pass the bill to increase stimulus payments to individuals from $600 to $2,000 "anytime soon," which could lead to a showdown of the annual National Defense Authorization Act, which President Trump vetoed last week. Senate Republicans planned to override that veto this week.

Outside of the messy world of U.S. politics, equity investors have been basking in gains since April. In fact, it's been quite the 32-year run for the stock market. Assuming it doesn't crash tomorrow, the S&P 500, including dividends, will have increased 11 out of the last 12 years and 16 out of the last 18 years. There have only been six down years since 1988, meaning the S&P 500 is on pace to be 27-6 over that time span.

That's a high note.

S&P 500 price chart

Big Tech's Dominance

In case it wasn't obvious, the last two years have presented a generational investing opportunity for technology investors. It's hard to believe that the performance of the technology sector in 2020 did not eclipse 2019's gains — but the pandemic kind of derailed the entire stock market for about a month. Still, we are on pace for back-to-back years of more than 40% gains for the S&P 500 Technology sector, which includes what S&P Dow Jones Indices calls Information Tech.

The top 10 holdings in that index may be surprising to some, but when you think about how our economy and marketplaces have changed in the past few years, it starts to make sense:

  • Apple
  • Microsoft
  • Visa
  • Nvidia
  • Mastercard
  • PayPal
  • Adobe
  • Salesforce
  • Intel
  • Cisco

The Active/Passage Divergence Continues

Another trend that has been playing out for the past 15 years, but widened in 2020, is the flow of assets from actively managed funds to passively managed funds. It's harder and harder for active fund managers to beat the market and pick the right stocks at the right time, and the high fees investors pay for this skill don't make much sense anymore given the growth and accessibility of index funds and ETFs.

To be sure, there is still some $12 trillion in U.S. mutual funds, and most of it is actively managed, but every year the delta between fund flows to active and passive funds widens, and more money leaves the mutual fund universe for ETFs. Expect this gap to widen in 2021.

Cumulative flows

Pharma Investors Sell the News

The U.K.'s approval of the COVID-19 vaccine developed by AstraZeneca and Oxford University is another important milestone in the battle against the deadly virus. Vaccinations will begin in hospitals on Jan. 4, and the company will supply up to 100 million doses in total. Pfizer's vaccine has already been administered to hundreds of thousands in high-risk groups.

This is not just a landmark moment for the scientists involved and the British public, but it is also good news for developing countries counting on the vaccine. Since the pharma giant has promised to sell it at no profit during the pandemic, it costs a fraction of Pfizer's and Moderna's vaccines.

Shares of AstraZeneca (AZN) popped a little on the news today, but investors have generally been "buying the rumor and selling the news" as it relates to the shares of vaccine makers. 

Since receiving FDA authorization for their COVID-19 vaccines, shares of Pfizer (PFE) are down 10.2% and shares of Moderna (MRNA) are down 18.7%. 


Stocks Hitting All-Time Highs

More than 80 stocks listed on the major U.S. exchanges (not including penny stocks) hit all-time highs today. That kind of breadth has been the trend of late, although there are more than a few return visitors to this list. Since it's our final "All-Time High" list of the year, we picked some of the most widely stocks for today's edition.

  • Tesla (TSLA) has defied the skeptics, shaken up the S&P 500, and delivered a mere 707% return for investors in 2020. Over the past five years, it has delivered better than a 1,500% return. 
  • Activision Blizzard (ATVI): Video game makers and publishers have owned 2020 and the stay-at-home economy. Both Activision and Take Two Interactive Software (TTWO) have hit all-time highs several times this year, and they are both loaded up with fresh titles for 2021.
  • Monster Beverage (MNST): Regular readers know that Monster Beverage is one of the top performing stocks of the past 20 years. Tiger Woods endorses the company, but other than that, it's hard to understand why investors have stuck with this energy drink maker.
  • Starbucks (SBUX): Another frequent visitor to the "All-Time High" list, the coffee company navigated 2020 brilliantly. It added Melody Hobson as non-exec chair and made a frothy pot of cash by securitizing all those gift cards. 
  • Disney (DIS): 2020 challenged Mickey Mouse's house as its theme park business basically evaporated due to the pandemic. New CEO Bob Chapek pivoted the 97-year-old company to be digital-first, and Disney+ proved to be a big winner in the streaming wars.
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