“It was the best of times; it was the worst of times.” That familiar opening phrase from “A Tale of Two Cities,” puts 2020 into perspective. We faced the challenge of a global pandemic, the likes of which we hadn’t seen in more than a century, and this led to a sharp bear market and economic recession.
In the United States, we lived through social unrest and a hotly contested presidential election. On the positive side, we saw significant advancements in technology and health care. Our capacity to conduct business remotely and work from home surged, and several COVID-19 vaccines were developed
and approved in record time.
Despite unprecedented economic and market disruptions, equities (measured by the S&P 500 Index) posted positive
returns greater than 18% in 2020, a remarkable advance during a global pandemic. Fixed income markets (as measured by the Bloomberg Barclays U.S. Aggregate Bond Index) returned 7.51% for the year as the Federal Reserve trimmed rates to historically low levels and provided unparalleled support for bond markets.
Equity market leadership broadened and shifted during the fourth quarter of 2020. Small-cap stocks dramatically outperformed large-cap stocks in the quarter, as the Russell 2000 and S&P 500 returned 31.37% and 12.15%, respectively. Additionally, value stocks outperformed their growth counterparts.
Interest rates increased during the quarter as the yield on the 10-year U.S. Treasury bond jumped from 0.70% to 0.93%. Despite the increase in rates, the risk-on sentiment (in which riskier assets are favored over safer assets) spilled into the fixed-income markets, as the Bloomberg
Barclays High Yield Corporate Index returned 6.45% and the Bloomberg Barclays U.S. Aggregate Bond Index returned 0.67% in the quarter.
This trend held true in January, as small caps outpaced large caps, returning 5.03% and 1.01%, respectively. High-yield bonds continued to outshine investment-grade bonds, even as the 10-year U.S. Treasury yield increased to 1.11%.
International developed equity markets have trailed the U.S. stock market for years, and 2020 was no different as the MCSI EAFE Index returned 7.82%. The fourth quarter was a different story, though, as international equity returns surpassed 16%, beating U.S. large caps by nearly 4%. Will a rotation to international equities, after more than 10 years of trailing U.S. markets, continue in 2021?
The economic recovery from one of the sharpest and quickest declines in history stayed on course in the fourth quarter and is expected to continue throughout 2021. After reaching historic levels of unemployment (greater than 16%) in April 2020, the labor market has improved steadily, regaining nearly 75% of lost employment. The January Composite Flash PMI (a measure of business conditions) reached 58 as manufacturing hit 59.1 andservices checked in at 57.5. Both handily beat their estimates of 56.5 and 53.8, respectively.
Consumer confidence increased to 87.1 in December, the first uptick in two months, and continued to climb in January, reaching 89.3 as the rollout of vaccines increased and Congress passed additional stimulus. Weekly jobless claims rose in December from approximately 750,000 to over 900,000 as regional lockdowns, due to spiking infections, caused more job losses. Most recently, during the week of Jan. 28, claims dipped to 847,000 as moreregions and states began the process of lifting restrictions.
After a nearly 40% annualized decline in U.S. GDP during the second quarter of 2020, the economy bounced back to finish with an overall decline of 3.5% for the year. Expectations for economic growth in 2021 are positive.
The International Monetary Fund (IMF) recently revised its 2021 global growth forecast to 5.5%, the highest figure since 2007. This global recovery is expected to show some variance, as some countries are in better shape economically than others. The IMF is forecasting 5.1% growth in U.S. GDP, with the strongest growth expected to come during the third and fourth quarters. Despite this projected growth, inflation concerns remain muted.
In Washington, a new stimulus plan was on the table in January. The elements being debated included an extension of unemployment insurance, an expansion of tax credits for low- and middle-income families, billions of dollars in low-interest loans and grants for small businesses, and a hotly debated increase in the minimum wage to $15 an hour (though this may not survive negotiations).
Developments in this proposal and any future stimulus packages are worth keeping an eye on moving forward.
While we are glad to have 2020 behind us, the events of the year remind us that, despite anyone’s best efforts to anticipate future events and their effects on markets and the economy, the ability to do so is limited. We must therefore rely on principles that endure over time and have served us and our clients well.
Diversification and appropriate asset allocation are not often in vogue. The fourth-quarter reversal from growth to value, large caps to small caps, and U.S. to foreign equities reminded investors of the importance of diversification.
If you have questions, as always, please contact your Regency Advisor.
Focus360 Disclosure: Past performance is not indicative of future results, and inherent in any investment in the market is a possibility of loss. There are inherent limitations in making assumptions due to the cyclical nature of the market.