In a fitting end for 2020, Q4 offered more political unrest and renewed coronavirus lockdowns. But on Wall Street, the fourth quarter would be most influenced by science and medicine. The news in November that two vaccines had been highly effective against COVID-19 in clinical trials strengthened a final rally, and the FDA authorized both vaccines for emergency use weeks later. All three major Wall Street indices ended the year with 12-month gains, with the Nasdaq Composite far outpacing the Dow Jones Industrial Average and the S&P 500.
Also of note in the fourth quarter of 2020, two important deals were struck after much negotiation. In our nation’s capital, Congress approved a second economic stimulus package in response to the pandemic. Overseas, the United Kingdom and the European Union met the deadline to forge a post-Brexit trade agreement. As a tragic year came to a wrap, participants in financial markets here and abroad looked to anticipated vaccine rollouts, further economic support measures, and dovish monetary policies to help stabilize the global economy in 2021.
U.S. – Steadying the Ship
GDP: After a precipitous drop, GDP started to rebound as the Federal Reserve Bank of Atlanta’s GDP Now forecast reached 8.7% for Q4 – its highest reading since before the pandemic hit. Buoyed by the prospects of vaccines and additional stimulus on the horizon, U.S. consumer confidence remained high.
UNEMPLOYMENT: The Department of Labor statistics showed headline unemployment lessening slightly in the quarter, from to 6.9% in October to 6.7% in November. The U-6 jobless rate, which counts both the unemployed and the underemployed, hovered right around 12% for October and November. The economy added 610,000 net new jobs in the quarter’s first month, and 245,000 in its second. 
HOUSING: Existing home sales rose in November after a decline in October. The National Association of Realtors reported residential resales improving 4.5% in October, then dipping by 2.5% in November. As for new homes, the Census Bureau said they plunged 11.0% in November, following a 2.1% October descent. 
INTERNATIONAL: Brexit Impact
Beating the year-end deadline, The United Kingdom and European Union hammered out a post-Brexit trade agreement. Michel Barnier, the E.U.’s chief negotiator in the deal, called the Brexit “an act of mutual weakening.” The E.U. has lost one of its largest members, one that accounted for about a sixth of its economy. While the
U.K. gains some political control, its residents can no longer live or work in much of Europe with the ease they once knew, and its economy and financial industry may face potential setbacks. 
U.S. EQUITIES: Optimism grew on Wall Street as the quarter progressed. The Nasdaq Composite, S&P 500, and Dow Jones Industrial Average all saw double-digit Q4 gains, and all three benchmarks advanced for 2020. 
The Nasdaq had a banner year, as traders readily bought shares of technology firms whose products helped people work at home. It wrapped up 2020 at 12,888.28. The S&P 500 settled at 3,756.07 on December 31, while the Dow ended the year at 30,606.48. 
DEVELOPED INTERNATIONAL EQUITIES: The MSCI EAFE Index, tracking shares in 21 stock exchanges outside North America, rose 15.75% for Q4. The top 3-month gainer among national benchmarks was Brazil’s Bovespa, up 25.81% in Q4, and that was hardly the only major climb. India’s Nifty 50 rose 24.31%, South Korea’s Kospi Composite 23.44%, and Spain’s IBEX 35 20.21%. In Japan, the Nikkei 225 added 18.37%. Hong Kong’s Hang Seng improved 16.08%, France’s CAC 40 15.57%. China’s Shanghai Composite gained 7.92%, Germany’s DAX 7.51%. [9,10]
EMERGING MARKETS: China’s powerful economy was expanding again, according to China government reports. The nation’s official factory sector purchasing manager index stood at 51.9 in December, down from 52.1 in November; anything over 50 signifies sector growth. China’s services PMI has been above 50 for ten months. China’s government never announced an economic growth target last year; according to CNBC, its 2020 gross domestic product will approach 2.0%, compared to the 6.0% GDP of 2019. [7,8]
Low for Now
U.S. FIXED INCOME: Federal Reserve chairman Jerome Powell stated on December 16th that the central bank would keep buying bonds until the economy showed “substantial” improvement. To many traders and market analysts, that commitment signaled that interest rates might stay near historic lows for years; in fact, the latest consensus opinion among Fed policymakers projects no change for the federal funds rate through 2023. On the back of these comments, Treasury yields rose in Q4, with the 10-year note approaching 1%. Its peak yield for the quarter: 0.98%, on November 10.12 The Barclay’s Aggregate index posted a modest 0.71% return in the face of rising rates after an almost 7% return to date.
DEVELOPED INTERNATIONAL FIXED INCOME: Rates ticked up gradually overseas as the recovery from lows seen in March continued. The Global Aggregate Index posted a 1.08% return for the quarter and finished the year with a gain of 4.75%.
Change in Momentum
Since 2018, six stocks have constituted almost 25% of the S&P 500 Index market capitalization: Facebook, Apple, Amazon, Netflix, Google and Microsoft (FAANGM). These “Big 6” Tech companies returned over 130% compared to a mere 35% gain for the S&P 500. They also kept a lid on their supply by buying back almost 1.1 billion shares between the companies over the last three years, helping their stock prices rise further. With the top names trading at price-to-earnings ratios in the 30’s, the valuation spread among the stocks within the S&P 500 has never been higher. Outside of the FAANGM companies, more reasonable valuations are ripe with opportunity as lagging stocks are trading in the teens.
After more than 10 years of the S&P 500 leading the pack – and especially U.S. Large Cap – which has led all asset classes and styles over the last 5 years as seen in the chart below, many questioned the validity of diversification outside of the U.S. However, patient investors are finally being rewarded as a weakening U.S. dollar and a pickup in global growth are both fueling a shift. Investors are starting to see increasing demand for sectors both within and outside of the U.S. that have been out of favor for many years. As seen below, U.S. Mid and Small caps and Global stocks – including Emerging markets – all started to outperform during the 4th quarter. The relatively attractive valuations found within these sectors coupled with improved sentiment should support these emerging trend changes going forward.
DPWM 2020 OUTLOOK:
Diversification Always Pays Off…Eventually
Many Americans believe that 2021 will be better than 2020. The glass-half-full outlook sees most of the nation vaccinated by spring; those in the half-empty camp estimate it will be fall before we see anything resembling “back to normal.” In either scenario, investor optimism is anticipated to rise as the vaccine becomes more widely distributed and business sectors hurt by the stay-at-home orders could see a bounce back before the end of the year.13 Combine that with additional stimulus in the coming months and broadening fiscal spending likely to come with the new administration, and we are expecting to see continued economic acceleration and job growth to go along with the widespread bullish sentiment found on Wall Street at the end of 2020.
Relative under-performers as seen in the table above are likely to benefit as well as those regions that appear to be relatively undervalued. The long period of out-performance by the S&P 500 since 2008 (chart below) has resulted in valuations that are stretched versus international markets. The valuation metrics depicted have reached levels that are well below their 20-year averages yet appear to be bottoming out if not turning a corner.
At Denver Private Wealth Management, our portfolios are constructed within a globally diversified framework across a wide spectrum of stock, bond, and alternative investments. Our equity exposures, both domestic and overseas, should benefit as measurable progress against the pandemic renews investor enthusiasm, especially amid additional stimuli. As we see economic and profit growth accelerate in 2021, the aforementioned long-term lagging asset classes may finally become the new leaders in a hotly anticipated post-pandemic market. Patient investors should once again see the value in diversification.
- CNN, November 18, 2020
- S. Department of Health & Human Services, December 21, 2020
- Minneapolis Star-Tribune, December 27, 2020
- Investing.com, December 30, 2020
- Associated Press, December 16, 2020
- New York Times, December 31, 2020
- MSN, December 30, 2020
- CNBC, December 30, 2020
- Wall Street Journal, December 31, 2020
- Barchart.com, December 31, 2020
- Wall Street Journal, December 31, 2020
- Treasury.gov, December 31, 2020
- Wall Street Journal, December 31, 2020
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
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