February 2021 performance update
Hi folks, here with a February performance update. Here are the key numbers for the month:
Stoney Point Prime picks: 1.36%
Stoney Point Select picks: 2.79%
“The market” (S&P 500-tracking SPY ETF): 1.78%
“Bogleheads” (80% VTI, 20% BND): 1.42%
A few notes:
There was a lot of volatility in February. As you can see in the chart below, valuations were a lot higher about mid-way through the month. As of Feb. 16, for example, Prime was up 6.56%, Select was up 7.98%, SPY was up 4.97%, and the Bogleheads blended ETF portfolio was up 4.40%.
Valuations dropped off sharply in the last week or so (also easy to spot in the chart). One plausible explanation is the rise in interest rates in the month. The 20-year Treasury yield rose from 1.92% to 2.25% from 2/16 through 2/25. The typical large-ish stock has a cash flow duration in the range of 10-20 years (in my experience), meaning that a 1 percent increase in Treasuries reduces value of 10-20%. From that perspective, the declines in the back half of the month make a lot of sense: SPY declined -3.19% over that period, which implies a duration of 9.9 years for the average S&P 500 stock (asset values—not just stocks, but all assets—decline when rates rise because any asset’s value is just the present value of its future cash flows, where its present value equals the sum of CF(n)/(1+r)^n as n increases, where CF(n) = cash flow in year “n” and r is the discount rate, generally equal to the “risk free rate” (Treasury rate) + a risk premium).
The rise in rates isn’t "bad” news per se. Arguably, rates rose because economic growth forecasts look really good, and the market is anticipating the Fed will raise rates in the future to avoid overheating. Those market-wide expectations about the future show up in valuations today. I.e., the overheating may simply indicate that expectations of overall economic performance look pretty good, which may ultimately be good for stocks.
With rates rising from historical lows, it naturally raises the question of whether or not anyone should really be in bonds right now (under the idea that bond values will mechanically decline as rates increase). Surely, people will not abandon bonds wholesale, but this line of thinking generally supports the idea that equities should outperform bonds for the foreseeable future.
One note about a specific pick: Twitter (a Prime pick last month) was up 51% last month. Wild.
That’s all for now As usual, you can check out the position-level February performance for our Prime and Select picks on our performance page and our picks for March here.
