The year of 2020 is mercifully behind us. It was a truly extraordinary year for the entire world and even more so for financial markets. The year started with the impeachment of an American President, followed by a pandemic that infected millions all over the world, a global recession which this pandemic caused, a bear market reminiscent of the financial crisis of 2008 and a level of social unrest that overshadowed the late 1960s – all of that unfolding against the backdrop of a presidential election, contentious to the point where fears of civil conflict were openly discussed. Yet, despite all of this, stocks recorded a solid gain in the quarter, bringing all the major indexes to record highs. After the nine-month long divergence in performance between the largest U.S. tech stocks and the rest of the market reached historical extremes, the fourth quarter finally demonstrated broader market participation and a rotation in leadership. While much of the recovery was driven by monetary and fiscal stimulus, the most recent catalyst appeared to be the arrival of a COVID-19 vaccine and a program to begin vaccinating Americans. With this news, the market was able to look beyond the next few quarters and envision a country and world largely getting back to normal. The value stocks, previously the market laggards, rallied sharply and regained some ground versus their growth counterparts. Mid- and small-capitalization companies, which felt the impact of the COVID-19 sell-off the most, rallied strongly to finish the quarter and the year with double-digit returns, in line with all the major market indexes. International markets also finished the year strong with the year-end surge bringing the MSCI EAFE Index into positive territory.
The fixed income markets ended the year with positive results. The U.S. Treasury yield curve finally demonstrated some movement during the quarter, rising across most maturities. The 10-year Treasury closed the year at 0.93%, which was up from September though remained well below 2019’s 1.92% year-end yield. Mortgage rates remained low helping to sustain the strong housing market. Credit spreads in both high yield and investment grade corporate debt tightened meaningfully during the quarter.
The 2020 recession, which officially began in February, ended the longest economic expansion in U.S. history. Throughout the year, our domestic economy continued showing signs of recovery and resilience. Business confidence and spending held up well despite rising COVID-19 case counts in the late fall and early winter. Employment has strongly rebounded with over 12 million jobs recovered since May. The housing market soared as record low interest rates and higher demand from people wanting to move away from big cities pushed housing prices up. Consumer confidence has trended higher, albeit way below the levels seen early in 2020. Manufacturing has been strong in November and December with the ISM Purchasing Managers Index returning to pre-pandemic levels in October.
The fiscal response to the pandemic in the form of relief packages and accommodating monetary policies has very clearly helped to cushion the U.S. economy from any extended economic disaster resulting from the pandemic. In addition to the March CARES Act and the new economic stimulus package the Congress passed in December, the Federal Open Market Committee at its last 2020 meeting voted to maintain the Federal Funds target rate in a range of 0.00%-0.25%. The Committee also extended the Fed’s current pace of asset purchases to be maintained until substantial further progress towards inflation and employment goals are achieved.
With the wreckage of 2020 in the rearview mirror, investor optimism for the new year is running high. After all, how could it possibly be any worse than a year marked by a deadly pandemic, a brutal recession and one of the steepest bear markets in history? Although the start of 2021 has been anything but ordinary with the images of mobs protesting the outcome of the election and the second impeachment of the President for the first time in history, the markets have remained mostly untroubled by those developments. Digesting the new power structure in Washington, with Democrats controlling the White House and Capitol Hill, the markets are taking comfort in realizing that narrow margins in both chambers of Congress may curb some of the most ambitious policy changes of the new administration. The new structure should also support those initiatives having bipartisan support, like further relief packages, additional rounds of stimulus and infrastructure spending. Tax increases are likely to be used to offset the cost of the new administration spending plans, but, while the ideas of a modest increase in corporate tax and top individual tax rates are likely to succeed, any drastic changes to the estate tax or increasing taxes on capital gains have far less agreement among both Democrats and Republicans.
There is no doubt the year 2021 is poised to be a critical turning point on several fronts, whether it is the vaccine-assisted defeat of COVID-19, the resurgence of global economic growth, or the transformation of how we live and work in the digital age. We believe that the U.S. economy should move from a recovery to an expansion phase once vaccines are widely available and the economy can fully reopen. Stocks should get a boost from this move, combined with continued accommodative monetary policy, fiscal support for households and businesses and tepid real returns on bonds. That does not mean there will not be unexpected shocks that cause market downturns, but we do believe they will be short in duration.
Although the events of 2020 may indeed be once in a lifetime, ultimately the biggest determinant of investors’ return for this year was the same we have always been promoting – being able to withstand the impulsive urge to do something when others have panicked. Ultimately, it proved successful during one of the most tumultuous years in memory and we are prepared for the upcoming year with our time-tested approach. Thank you for your trust and confidence and we wish you all a happy and healthy new year.
Dumont & Blake Investment Advisors, LLC
December 31, 2020