2020 – An unprecedented year of contrast
The year 2020 will forever be marked as the year of COVID-19; a virus that saw more than 20 million infected and took more than 300,000 American lives; more than 1.5 million around the globe; a pandemic that forced the entire world to shut down. This virus is still impacting our lives and infecting more than 200,000 every day. Recent vaccine developments finally offer some light at the end of the proverbial tunnel and reasons for optimism.
On the heels of the outstanding market performance of 2019, we entered 2020 with caution, fully expecting to experience increased levels of volatility, especially with an approaching presidential election in the second half of the year. We never imagined what would unfold over the ensuing months, making 2020 truly a year of extreme contrasts. Much happened in 2020. We opened with the longest bull market and economic expansion in our nation’s history, only to see a pandemic shutdown the global economy, forcing the S&P 500 to endure its worst quarter since 2008. April through June snapped back, delivering its best quarter since 1998, and effectively gave us the fastest bear market, followed by the quickest bull market, ever. On the economic front, the nation contracted sharply into recession with the second quarter’s annualized historic collapse of -31.7%, quickly bouncing back more than 33% in the third quarter, both marking the largest single quarter of economic quarter-over-quarter GDP contraction and expansion in our history. Oil futures went into negative territory but closed the year just under $50/barrel. We witnessed the election saga unfold that flipped the script in early 2021, giving political sweep to the Blue Team and providing President Elect Biden with little opposition to advance his agenda. The S&P 500 hit 33 record highs in 2020, and experienced moves greater than 1% up or down in 110 of the 253 trading days, compared to 38 days in 2019. In March we experienced a single day drop of -12% along with two rallies more than +9%. Looking back on 2020 is a mind-numbing task, to say the least.
Fourth Quarter Market Performance
The final three months of 2020 got off to a rocky start. As the election approached, volatility increased and large cap equities grinded lower, with the S&P 500 selling off -2.7% for the month of October. With political clarity of sorts and vaccine optimism, the markets turned in solid consecutive months to close out 2020. The S&P 500 finished up +12.1% for the quarter and +18.4% for the year. In these results, Big Tech was yet again the darling, with the NASDAQ closing out the quarter up +15.4%, and +46.6% for the year. As the economic recovery continued and multiple vaccines were approved, small and mid-sized companies, as measured by the Russell 2000 and S&P MidCap 400, caught a bid, gaining +31.4% and +24.4% respectively for the quarter and +19.96% and +13.66%, respectively for the year.
The coupling of a stronger economic recovery and weakening dollar led to solid returns for emerging markets in the fourth quarter of +19.77%, and +18.69% for the year, as measured by the MSCI Emerging Market index. Conversely, already on fragile ground entering 2020 with the Eurozone barely squeezing out positive growth and Japan contracting in the fourth quarter of 2019, the developed nations outside of the US have lagged in the recovery. MSCI EAFE Index outpaced the S&P 500 in the fourth quarter by gaining +16.09%, but the benchmark lagged its US counterpart for the year, gaining only +8.28%.
Entering 2020, the yield on the 10-Year Treasury note sat at 1.91%, with expectations of moderate increases from this level. However, when COVID-19 hit, and lockdowns began, investors fled all risk assets (equities and bonds) in favor of US Treasury securities; pushing the yield to historically low levels below 0.50%, before normalizing and increasing to close out the year at 0.87%. With the Federal Reserve in aggressive accommodation mode, dropping rates to zero, minting a new policy framework and launching Quantitative Easing IV, their purchases continued to support Treasury and mortgage-backed securities. Even with the yield on the 10-Year Treasury note inching 0.23% higher over the quarter, the Bloomberg Barclays U.S. Aggregate Bond Index still eked out a +0.67% return, bringing the index’s 2020 return to +7.51%.
Uneven Recovery
While equity markets continued to soar to new highs, the clear gap between the markets and economic fundamentals widened, highlighting the disconnect between Wall Street and Main Street. Given that this recession is non-traditional in that it was not caused by a financial disaster, rather a natural disaster/global pandemic, the remarkable ‘V’ shaped recovery we witnessed once lockdown mandates were lifted was not so surprising. However, as we wrote in our third quarter update, many areas of the economy have started slowing because of spiking COVID-19 cases and the resulting new mandates that were enforced; with many of service-oriented businesses (restaurants, hospitality, and travel) hit the hardest. A prominent indicator measuring economic activity, the composite Purchasing Managers Index (PMI) has moderated recently, though continued the ‘V’ shaped recovery since bouncing from its sub-30 April reading, to levels last seen pre-COVID at +57.6. For perspective, a reading above 50 indicates expansion, while a number below 50 indicates contraction. Perhaps more telling are the two components of the composite PMI, Manufacturing and Services PMI.
Given the service-oriented industries such as leisure, travel, hospitality, dining, and other major service-oriented sectors were shut down in March, we witnessed a larger contraction in services, yet as mandates were lifted, or loosened, activity in these sectors picked up and in a major way, spiking to levels we have not experienced in nearly two years. Given the transition from a manufacturing-based economy to a more services-based economy that our nation has undergone over the past several years, the health in our services sector is extremely important to a sustainable recovery, since services now make up about 2/3 of our nation’s growth. As COVID-19 mandates and job losses in the service sector increased, December saw the Services PMI tick down to 54.8 from 58.4 in November. This indicator’s trend will be important to monitor as the first quarter progresses and vaccines are administered. Following our nation’s largest fiscal and monetary stimulus programs implemented to combat the economic fallout from the coronavirus, consumers took to the street, purchasing homes, cars and other discretionary items to drive spending back towards pre-pandemic levels. Though like the PMI, retail sales and consumer spending has stalled as of late. Despite a last-minute fiscal stimulus package, moderation in economic activity over the last several months has led many to lower their fourth quarter GDP outlooks; Bloomberg forecasts a mere +2.5% real GDP output in the fourth quarter, which would leave GDP for the full year -2.8%. April saw the unemployment rate peak at post Great Depression highs of 14.7%, and while the headline unemployment rate has continued to recover with November and December’s unemployment rate holding at 6.7%, the bottom line is that like other areas of the economy, the labor market’s recovery has been gone from moderating to worsening. Weekly first-time unemployment claims and continuing claims halted their downward trend from their April highs, with both reversing courses as of late. Unemployment claims, or those filing for unemployment for the first time, remain under one million, with the weekly average elevated over the peak of the 2008 Great Financial Crisis. Perhaps a better guide to employment, continuing claims, or those that are still filing for unemployment benefits, have retraced from close to 26 million in April to a four-week moving average of approximately five million in recent weeks. Late November saw the first weekly unemployment claims increase since April; November as a whole showed the first monthly drop of more than 74,000 in household employment since April. As a result of new daily high coronavirus cases and increased social distancing measures, unemployment claims remained elevated throughout December, which resulted in the first negative jobs report since the late spring recovery. While 140,000 jobs were lost in December and the unemployment rate held steady at 6.7%, it is important to remember that like most economic indicators, the jobs report is backward looking. December’s disappointing labor market report only contained data through the middle of the month and given the surging COVID cases to close out the year, it is reasonable to believe the figures are both outdated and underestimate the actual number of jobs lost during the year’s final month, especially given December’s report showed most of the job losses appeared in the hospitality sector.
The rest of the Quarterly Update covers the Federal Reserve, Congressional Stimulus, and other Implications moving forward. To read more, CLICK HERE.
The preceding commentaries are (1) the opinions of Chris Osmond and Eric Krause and not necessarily the opinions of PCIA, (2) are for informational purposes only, and (3) should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.
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