Fourth Quarter 2020 Market and Economic Review
In our last Market and Economic update, we ended with several questions that we hoped would be addressed before the end of the year. Will we get a vaccine? Who will win the election? Will the results of the election be accepted right away? Will we get another stimulus package and what will it look like? As investors gained clarity to each of these questions one-by-one, the market reacted favorably as uncertainty started to dissipate.
Following the trend throughout the year, large U.S. companies have continued to post positive results. The S&P 500, which tracks the 500 largest publicly traded companies in the U.S., was up 12.15% on the quarter and 18.4% for the year. While the S&P 500 tends to be oriented heavily towards large growth stocks (like technology), the announcement of a COVID-19 vaccination reversed the trend of growth stocks outperforming value stocks (like blue-chip companies). The equal-weighted S&P 500, which is more representative of the entire market, including value stocks, was up 18.46% on the quarter and 12.83% for the year, narrowing the gap between the two styles.
The Russell 2000, which tracks the performance of U.S. small companies, reached an all-time high. Rising 31.37% for the quarter it finished the year positive at 20.02%. Most of the sudden rise is attributed to the expectation that as more people are vaccinated, revenue will return to these smaller corporations that didn’t have as much growth during the pandemic.
For U.S. stocks, we use the Value Line Geometric Composite Index as a benchmark as it gives a representation of all U.S. stocks across all investing styles and sectors. The equal-weighted index, which contains 1,400 domestic stocks, was up 24.21% during Q4 and 3% for 2020. Though the index had impressive returns over the fourth quarter, there are still several sectors that haven’t recovered as much that aren’t represented in the major indexes above.
The MSCI EAFE, which follows the returns of 21 developed nations, followed the trend of having strong quarterly returns of 16.05% which moves the index into positive territory for the year at 7.82%. Emerging markets indexes that include countries such as China, India, and Brazil, were up 19.70% for the quarter which also moves the index positive for the year at 18.31%. In addition to the boost received from a COVID-19 vaccine, expectations are that trade relations will improve, and geopolitical tensions will decrease during Biden’s presidential term.
Oil also has benefitted from the expectation that the vaccine will lead to a return to normalcy in transportation and travel. After WTI crude oil saw a rally of about 15% directly after the first official announcement of a vaccine, prices have stayed relatively flat. Due to the potential of domestic lockdowns, the current international lockdowns, and the potentially prolonged rollout of the vaccine, investors have been worried about a possible oversupply in crude oil.
The bond market, which has consistently been one of the best performing asset classes this year, lost steam in the fourth quarter compared to the other asset classes. The Bloomberg Barclay’s U.S. Aggregate Bond Index finished the year up 7.51% with 0.67% coming in the fourth quarter. Earlier in the year, more conservative investors chose to move from the volatility of the stock market, and the demand for bonds drove the price up despite lower interest rates. Though the abnormally high rates of return on bonds have been welcomed by more conservative investors, with the Fed standing firm that interest rates will remain low for the foreseeable future, bond prices should find stability and the rate of return will likely return to historic norms.
*Each benchmark is allocated based on assumed Risk Profile of underlying indexes.
**Benchmarks include a mixture of ICE BofA US 3-month Treasury Bill Index, Barclays Global Aggregate X-US Index, Barclays US Aggregate Index, Barclays Multiverse Index., Barclays US Credit Index, MSCI EAFE Net Index, Value Line Composite Index (Geometric) and the Barclays Global High Yield Index. These benchmarks are the same as those in the Risk/Return and Account Analytics sections of client quarterly performance reports. By comparing your portfolio’s return to the benchmark with the closest risk/return characteristics, you get a more accurate reading of portfolio performance than using a less diversified benchmark, such as the S&P 500 index.
While the market performed remarkably well during the fourth quarter, the economy has been slower to react and improve, a trend that will likely last throughout the rollout of the vaccine over the next few quarters.
In fact, the latest U.S. employment report suggests that the economy will face short-term headwinds from the current second wave of COVID-19 cases. In October, consumer spending showed a sharp decrease which resulted in significantly slower new job growth during November. Although the unemployment rate did fall slightly, a large number of people departed the labor force, likely discouraged by the scarcity of available jobs.
Domestically, talks of a stimulus package remained open over the quarter and the two parties were able to reach an agreement in late December. The $900 billion plan sends aid to individuals in the form of a $600 income-adjusted stimulus check, to small businesses with $284 billion from the Paycheck Protection Plan (PPP), and to states with $70 billion allocated to purchase and distribute vaccines. Additional federal unemployment payouts were extended, as was the eviction moratorium for families struggling with rent payments. President-elect Biden has stated that he doesn’t believe the second package is enough to support Americans and anticipates a third round in early 2021.
Internationally, continual waves of the virus hit many countries hard causing varying degrees of government lockdowns. While government action has appeared to have slowed the spread of the virus, the fourth-quarter GDP will likely decline.
In addition to dealing with issues surrounding the pandemic, the UK has been negotiating with the European Union regarding the terms of Brexit. Prime Minister Boris Johnson stated that a no-deal Brexit at the end of the year was the most likely outcome, but in the final hours before the deadline a deal was negotiated. By avoiding a no-deal exit, trade between the EU and the UK can continue as normal as most of the EU trading rules will remain as they were before. Though reaching a resolution has been seen as positive, the British Pound relative to the U.S. Dollar is the lowest it has been since the mid-80s due to the prolonged period of uncertainty.
2020 has been an unprecedented year in many respects. Extreme volatility in both the stock and bond markets was followed by quick recoveries and stabilization. And we have spent many nights at home with either limited OR an overabundance of contact with our families. We hope that 2021 brings at least a partial return to normalcy to your family, and we stand ready to adjust your portfolios as needed to take advantage of new trends as they emerge. We wish you and your families a very healthy and happy new year.