Who could have known what lie ahead this time last year? 2020 began with high hopes and ended in the same way. Throughout the year, the pandemic, politics, civil unrest and markets all provided surprising twists and turns. Above all, 2020 seems to have accelerated many new social and economic trends.
2020 Market Recap
All three major indices closed the year at all-time highs. Cumulative total returns with dividends included were 9.7% for the DJIA, 18.4% for the S&P 500, while the tech heavy Nasdaq climbed 44.9%.
Government bonds rallied as economies were shut down by political leaders around the world. Ten-year U.S. Treasuries closed the year at a 0.92% yield after starting 2020 at 1.90%. Corporate and municipal bonds plunged in February and March, along with many other assets, as lock downs took hold.
The Federal Reserve came to the rescue after the fastest 30% market drop on record took place in about 30 days. Once the Fed began buying bonds of all sorts, fixed income markets rallied, stocks bottomed and sentiment along with longer U.S. Treasury rates came off the mat. The Fed continues to buy treasury and mortgage bonds at the pace of $120 billion per month.
The Fed’s balance sheet grew to $7.2 trillion, up from $800 billion at the end of George Bush’s last term. Congress passed two relief bills, spending over $3 trillion. Our National debt soared to 108% of GDP versus the 18.9% average after the Korean War up to Mr. Obama’s presidency. The federal debt level is now $28 trillion.
We started 2020 with a 3.5% unemployment rate, which soared mid-year to 14.8% and closed at 6.7%, according to the US Bureau of Labor Statistics.
Negative interest rates prevailed in Europe and Japan for most of 2020. Over $18 trillion of the world’s debt paid negative interest rates at one point.
Social norms were upended as the virus not only took lives, it took away livelihoods. We became more of a “have” and “have-not” economy. We experienced a work from home surge which benefited companies associated with technology. This led to the top five performing stocks in the S&P 500 accounting for half the index gains. Zooming with family, friends and business colleagues became a new norm.
All of this turmoil was matched on the political front with President Trump being impeached by the House of Representatives and later acquitted by the Senate.
Our political divide deepened as the November election ended. As we saw last week, the Senate swung to Democratic control after winning two seats in Georgia, leading to a 50-50 split with the deciding vote going to the next Vice President, Kamala Harris. Riots at the House of Representatives the day of electoral certification caused a national shockwave.
2020 saw many changes in how people invest and deploy capital. Speculation and risk taking soared as those stuck at home used free trading apps like Robinhood, for entertainment. IPO’s raised more cash in 2020 than any year since 1999.
A new form of blank check company called SPACs (Special-Purpose Acquisition Company) also took in many billions of dollars as well-known money managers or entrepreneurs raised cash that will later buy assets to form new enterprises.
2021 Market Outlook
The new year has begun with markets moving drastically higher. In the last 60 days we have seen presidential election results, announcements of at least two effective COVID-19 vaccines, a $900 billion government stimulus bill approved, the beginning of global inoculations and the finalization of congressional power between parties. These issues were previously shrouded with uncertainty, which kept a great deal of cash on the sidelines. That cash is now being deployed by investors.
Predictions of rising GDP and corporate earnings from Wall Street at the beginning of each year are a long-standing tradition. Given COVID-19‘s grip on the real economy, this year’s crystal balls are still cloudy.
For now, the market will likely continue to look through any hiccups in the vaccine rollout, as long as overall progress is made. Already, we have seen how challenging the logistics are with only about 3 million vaccinations completed in the U.S. at the end of December. However, should the virus keep economies reeling longer than anticipated, investor optimism for getting back to “normal” may be tested.
Given the lack of attractive investment yields in the fixed income space, returns are expected to be better in stocks and hard assets as the economy recovers. Earnings in 2021 will show large year-over-year gains after a disastrous 2020. Growth companies have less room for disappointment while value companies have more. This environment can make investing challenging for those not willing to adapt.
We are concerned that inflation, long dead and forgotten will raise its ugly head as the year progresses. Most of today’s investor class has only seen falling interest rates. We expect a surprising year for many but less volatile than 2020. The Fed has told us they will err on the side of more rather than less stimulus with a 2% inflation target.
Janet Yellen at the helm of the Treasury will ensure policy will promote job growth.
We believe the era of sub 1% U.S. 10-year rates is over. The notes have risen to 1.13% as investors anticipate a post COVID-19 recovery after we suffer through a precarious winter.
Rising rates and rising inflation are bullish for cyclical assets. Growth stocks which outperformed value stocks by the greatest margin ever in 2020 may not lead in 2021. Foreign stocks, a decade long underperforming asset class, will likely do better in 2021.
Overall, the new year may be as unpredictable as 2020. We will do our very best to manage the turmoil. We are dedicated to our work and honored by your trust.
We wish you all a very happy and healthy 2021!
Doug Coppola - Investment Committee Chairman Steve Lindgren - Chief Investment Officer