4Q20 & Year-End Market Commentary

January 08, 2021
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It’s over! After one of the most challenging and bizarre years in modern history, 2020 is finally over! But, with COVID cases accelerating and as we saw from this week’s “chaos in the Capitol”, our world is far from what most anyone could call “normal”. Fortunately, the stock market, ever forward-looking, continues to shrug off the ugliness and powers higher. In fact, in what really started in September, the 4th quarter saw more breadth in the market, with the stocks, which had been underperforming since the pandemic started, began outperforming the mega-tech/FAANGs. Yes, the rotation we’ve been talking about for months has come and is bringing some normalcy back to the markets at least in terms of relative valuation. But can this “sea that is rising all ships” continue…read on to find out… But first, let’s take a look at how the major asset classes fared in 4Q20 and for the full calendar year:

Equities: Stock markets flourished in the 4th quarter, with the S&P500 up 12.2%, the MSCI AC World Index up 15.8%, and the MSCI AC World Index ex-USA (a good international proxy) up 17.0%. For the year, 18.4%, 16.3%, 10.7%, respectively. And to think that all major stock benchmarks were down over 30%+ at one point - wow!

Fixed Income:  The Barclays US Aggregate Bond Index registered a +0.7% showing for 4Q20 and finished 2020 up 7.5%. International fixed income exposure continued to bounce back after being beaten hard earlier this year as evidenced by the Barclays Global Aggregate Bond Index showing a +3.3% 4Q20 return and finishing the year up 9.2%. In an effort to prop up markets, the Fed lowered their Fed funds rate to 0-0.25% earlier in the year and has recently pledged to keep it low for longer. Which means return expectations for this asset class must be tempered with yield hard to come by. That being said, this asset class continues to play an important role in one’s portfolio by providing both downside protection and diversification.

Alternatives:  Alternatives had a solid 4Q20 as represented by the Wilshire Liquid Alternatives Index (“WLAI”), up 4.4% and the Morningstar Diversified Alts Index (“MDAI”), +5.5%. Of course, alternatives are a disparate bunch with a huge dispersion of returns within, which can be seen by the yearly performance difference by those benchmarks, a positive 3.2% YTD showing by the WLAI and a negative 2.6% showing by the MDAI.  An example of a loser in the space was oil, down 21% for the year as represented by the Nymex Crude Index.  Most of the alts we follow were up on the year, including gold (+24% for 2020), and served as a nice diversifier to the rest of the overall portfolio.

 Thus, for the diversified investors that stayed the course during a tumultuous year, 2020 almost unbelievably will go down as a positive one from a portfolio perspective. Those that traded emotionally and didn’t stay the course were most likely whipsawed by the frantic stock market collapse and rebound.  2020 was a good reminder for investors that markets don’t perfectly reflect the economy. Wall Street is not Main Street.

So where do we go from here? A lot of the uncertainty that remained in the backdrop for much of 2020 has now abated including:

  • Covid vaccines are here! Not just one, but multiple. Further, a second Covid Stimulus bill just signed a couple of weeks ago provides much needed relief for tens of millions of Americans. And expect a Covid Stimulus 3.0 bill once the new administration takes office.
  • The stress of Brexit is pretty much over with the UK and EU hammering out a deal.
  • And while we still deal with the aftermath of the chaos at the Capitol earlier this week, the US Presidential Election (and Georgia) is over. Schwab put out a great article about this: Washington Unrest: What Investors Should Know.

Yes, it feels pretty good to have 2020 in the rear view mirror. With the multiple vaccines in place, we could have the inoculation of close to half the US population by mid-year and life could return to “normal” in the second half. Woo-hoo!!! And as things return to normal, unemployment should go back down, the economy will surge given both the pent-up demand and pent-up supply. It’s going to be a sight to be seen!

And although 2021 should be the “year of recovery”, there are risks to the financial markets such as the possibility of a slow vaccine rollout, an economic recovery that’s not as strong as expected, and real inflation lurking around the corner. Dialing down into equities, US valuations are quite high – hopefully near term earnings will lead to some compression in those ratios – but it’s just another reason why investors should stay diversified. Lastly, looking down the road, this massive fiscal support effort has pushed debt and deficits to record levels; at some point, it has to be dealt with via higher taxes and/or spending cuts, etc.

In conclusion, congratulations to all of us on making it through one of the most bizarre years ever. The next few months should answer many of the questions surrounding the major concerns particularly on the pandemic; the economic recovery; and how we as a people heal, unite, and collectively move forward after such stressful times. At DWM, our focus is to remain disciplined in any environment that comes about and help our clients continue to achieve their long-term goals. Happy New Year.  

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