Morningstar - Q4 2020 - 20

Dispatches

A Tale of Two Markets

Different Angles Big tech helped the S&P 500; energy hurt the S&P/TSX Composite.
Growth of $10K

AMERICAS

Canada

S&P 500

S&P 500 ex-Top 5

S&P/TSX Composite

S&P/TSX Composite ex-Energy
10,242

Well, that was quick. Despite a bleak global
economic outlook and the continued uncertainty
brought on by the coronavirus pandemic,
the S&P 500 Index had recovered to its prepandemic
high by early August. Using the concept of
the "pain index" coined by Morningstar's Paul
Kaplan (see "Black Turkeys Everywhere" in
the Q2 2020 issue), the COVID-19 bear market
goes down as one of the least painful, lasting
a total of about 120 trading days, with a maximum
drawdown of about 34%.
We could speculate endlessly on the
reasons behind the U.S. stock market recovery;
however, it might be more useful to glean
some concrete insights into its nature. For one
thing, the S&P 500 is highly concentrated
in its five largest companies: Apple AAPL,
Microsoft MSFT, Amazon.com AMZN, Facebook
FB, and Alphabet GOOG/GOOGL, all of
which performed exceedingly well during
the pandemic.
To understand to what extent these five names
contributed to the index returns in this recovery,
we ran a simulation of the S&P 500 index without
them. To do this, we used the Morningstar CPMS
back-testing engine to replicate a market-capweighted portfolio of 494 companies, specifically
excluding these five companies (including
both share classes of Alphabet) starting Jan. 31.
The parameters of the test included a quarterly
rebalance at the end of March and June to
target weights with all dividends being reinvested
to mimic the index.
The test shows that without the five largest
companies, the S&P 500 would still have recovered
to peak or near-peak levels but would have been
a full 6% lower in value at the end of July,
assuming a common investment start date of Jan.
31. Although the market recovery can't be
attributed solely to the success of these five stocks,
they certainly played a critical role.

20

Morningstar Q4 2020

10,146
9,658
9,502

$11,000
10,000
9,000
8,000
7,000

02/2020

03/2020

04/2020

05/2020

06/2020

07/2020

Source: Morningstar CPMS.

The Canadian market hadn't recovered as of
August, however: The benchmark S&P/TSX
Composite Index was roughly 6% shy of its
prepandemic highs.
Like the S&P 500, the S&P/TSX Composite Index
also has 25% in five companies-but four of them
have been around for at least 50 years. With
the exception of Shopify SHOP, their performance
so far this year has been far from exceptional.
Moreover, as the sixth-largest energy producer in
the world, Canada gets over 10% of its GDP from
the energy sector-and energy stocks represent
13% in terms of weight of the benchmark
index. The pandemic brought with it a reduction
in demand for energy, which ultimately led to
depressed oil prices.
To understand the extent of this impact, we
ran a similar study as for the U.S. market, but
this time excluding the energy sector. On
Jan. 31, the simulated portfolio bought 197 stocks
on a market-float-weighted basis and was
rebalanced to target weights quarterly (once at
the end of March and again in June) with
dividends reinvested.
Without exposure to the energy sector, the
index would have recovered to prepandemic levels
by the end of July. In other words, having
exposure to the energy sector detracted 6.2%
from the index performance.

In the case of the U.S. market, having
concentration in the top five names has helped
performance during the recovery period of
the pandemic. Canada's concentration in energy
has detracted from its performance.
Passive investing in a broad-based index can still
mean significant exposure to a particular sector
or even a particular name. This unsystematic
risk can be offset by a well-diversified portfolio. For
Canadians in particular, not doing so has proved
to be catastrophic in the past.
Ian Tam, CFA, is director of investment research with
Morningstar Canada.

IPO Fever a
Global Trend
GREATER EUROPE

United Kingdom
Despite a general lack of enthusiasm for U.K.
equities broadly, high-profile companies
such as The Hut Group THG:UK recently had initial
public offerings. Others such as supercar-maker
McLaren and brewer BrewDog are mulling
the IPO option.


http://www.Amazon.com

Morningstar - Q4 2020

Table of Contents for the Digital Edition of Morningstar - Q4 2020

Contents
Morningstar - Q4 2020 - CT1
Morningstar - Q4 2020 - CT2
Morningstar - Q4 2020 - Cover1
Morningstar - Q4 2020 - Cover2
Morningstar - Q4 2020 - 1
Morningstar - Q4 2020 - 2
Morningstar - Q4 2020 - Contents
Morningstar - Q4 2020 - 4
Morningstar - Q4 2020 - 5
Morningstar - Q4 2020 - 6
Morningstar - Q4 2020 - 7
Morningstar - Q4 2020 - 8
Morningstar - Q4 2020 - 9
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Morningstar - Q4 2020 - 11
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Morningstar - Q4 2020 - Cover3
Morningstar - Q4 2020 - Cover4
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https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q4
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https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q2
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https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019winter
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https://www.nxtbook.com/nxtbooks/morningstar/magazine_20141011
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https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121011
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https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120405
https://www.nxtbook.com/nxtbooks/morningstar/investorconference2012
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20091011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090809
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https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007fall
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https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008catalog
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