Jan 06, 2021 Quarterly Newsletter Q4 2020
Posted By FAS Team
2020: Great Year for Stocks, Bad Year for Humanity
As we put 2020 in the rearview mirror, we feel it is important to take a moment to recognize the mental, physical and emotional hardships many have endured over the past year. In what may have been one of the most tumultuous years in recent history, we empathize with those who were forced to distance themselves from family and friends, whose finances and standards of living were affected, and with those whose family members’ or own health was imposed upon by the virus.
Despite experiencing the largest drop in markets since the Global Financial Crisis and steepest drop in quarterly GDP growth in post WWII history, the markets closed out 2020 on a very positive note. The final quarter of 2020 brought both political and medical clarity, resulting in substantial market gains over the past three months and helping make 2020 a surprisingly strong year for market returns.
All major U.S. stock indices were solidly higher in Q4, led once again by the tech-heavy Nasdaq, which mildly outperformed on still-lingering concerns about near-term economic growth following the surge in COVID-19 cases into year-end. The Nasdaq outperformance was minor relative to earlier in the year as the S&P 500 and Dow Jones Industrial Average also posted strong positive quarterly returns. On a full-year basis, however, the Nasdaq which returned over 43% for the year, handily outperformed the latter two indices which returned 16.3% and 6.6%, respectively, driven primarily by the secular growth potential of the tech sector amidst macroeconomic uncertainty. Tech was by far the best performing sector in 2020, being viewed as the greatest beneficiary of pandemic-related changes such as online shopping and work from home orders.
Small caps substantially outperformed large caps in Q4 and those late year gains helped small caps to slightly outperform large caps in 2020 as the Russell 2000 ended the year up 18.4%. Historically being less sensitive to economic slowdowns compared to small caps, large caps outperformed throughout the first three quarters of the year. However, that outperformance reversed during the last three months of the year on vaccine optimism, more stimulus from Congress, and a reiteration of very accommodative monetary policy from the Fed for at least the immediate future.
International markets, specifically emerging markets, also saw strong returns in Q4 thanks to anticipation of improving global growth due to vaccine distribution, additional stimulus from the European Central Bank, more clarity on Brexit, as well as from a weakening U.S. Dollar. The MSCI EAFE turned positive for the year in Q4 and returned mid-single digits for 2020, while the MSCI Emerging Market index trailed the S&P by less than 1%, returning 15.8% for the year.
The fixed income markets also ended the year on a positive note, although most of the Barclays US Bond Aggregate’s gains came earlier in the year following the historic lows in interest rates. The index ended Q4 relatively flat and returned 7.5% for the year. The 10-Year Treasury yield fell by over 1.38% from the start of the year through early-Q2, reaching 0.54% at its low point before ticking back up and ending the year at 0.93%.
Given the rollercoaster of a year it has been, if there is one thing we want people to take away from 2020 it is that market timing does not work. Try to visualize what your mindset was on March 23 (the market low) last year and think about what your outlook on the future was on that day. We were 10 days removed from President Trump declaring Covid-19 a National Emergency. States were beginning to issue lockdowns. Not only was the S&P down 34%, but the Barclays US Bond Aggregate – historically expected to provide negative correlation with equities – was down 6%. The CARES Act had not yet been passed. The future looked bleak with no immediate end in sight. Three days later the S&P was up 17% and recovered nearly all of its losses in less than three months and if you missed those crucial few weeks you were left behind. The markets did not look back and, barring a few small pullbacks along the way, went on to hit several new highs throughout the remainder of the year. Despite what we think or what we feel, timing the market is impossible and if you remained invested throughout those grim months you came out ahead on December 31.
As we look to the year ahead, the outlook for 2021 from a macroeconomic standpoint is surprisingly more positive than it was even at the start of 2020. The Fed is continuing its historic quantitative easing program and will keep rates low indefinitely, helping to support asset markets broadly. Additionally, Congress has finally agreed on another historically large fiscal stimulus bill, which will help the economy weather the still ongoing COVID-19 pandemic and related economic lockdowns. Politically, despite both democratic senate candidates winning the runoff in Georgia, neither party has a material majority in either house of Congress and as such, markets do not appear to be overly concerned about policy risks to the economy (substantial tax increases, excessive regulation, or major initiatives like healthcare reform). Finally, corporate America has once again demonstrated itself to be both resourceful and resilient, and while some industries (airlines, cruise lines, hotels) face a long road to total recovery, many – but by no means, all – American companies have exited 2020 in strong financial shape.
Welcome Jason Salinardi
Please join us in welcoming Jason Salinardi, J.D., LL.M. to the FAS Team, bringing with him nearly 20 years of experience in Estate, Trust, and Tax Planning. Jason has experience with the complexities of high net worth estate planning, but is able to work with families and individuals at any stage of their estate planning life. A St. Louis native, Jason attended the University of Missouri – Columbia and Kansas City for his M.A. in Accountancy, J.D., and LL.M. in Taxation. He and his wife, Molly, live in Leawood with their three daughters, Anna, Maria, and Sara. We are excited to add Jason and his expertise to the FAS family.
However, despite the several positive factors the economy has going, there are several pain points still lingering. Stock valuations are currently at multi-year highs and if earnings expectations begin to falter, stock prices will almost certainly follow. Unemployment remains even above levels we saw at the depths of the Global Financial Crisis and while most of those jobs are expected to come back, it is still unclear how many small businesses will have survived to provide these jobs. After two rounds of stimulus and over $3 trillion in stimulus spending, the national debt now sits at $27 trillion and the government’s deficit has increased by over 25%. With a 25% increase in the money supply and interest rates at historic lows, the threat of inflation is something to be monitored. The increasing demand from consumers as the economy begins to function at pre-pandemic levels could lead demand to outstrip supply, causing a rise in consumer prices. Furthermore, the Fed has specifically stated they intend to let inflation run for a while before raising interest rates. If it comes on too fast, they may have no options other than to increase rates, potentially leading to defaults from companies who have sustained themselves using debt at record-low rates.
None of these factors by themselves offset the positives helping the economy and markets as we begin a new year, but there certainly are
risks deserving of monitoring. Regardless of the optimism and inherent risks in the markets, it does not change the fact that the most important factor remains to be stay invested. If you found yourself uncomfortable during the depths of last year’s recession, it may make sense to reassess your ability and/or willingness to take risk and determine now, while the markets are near all-time highs, whether or not your current risk level is appropriate. Risk tolerances change and evolve as we age and reach different milestones in life. It is important to consider your emotions and mindset in March of last year and ask yourself if that is something you can mentally endure the next time – because there will almost certainly be a next time. The key is staying invested, remaining calm, and adhering to your plan.
Like all of you, we are happy to bid 2020 adieu. While a great year for the U.S. stock market, it was a terrible year for the human race. It was certainly surprising and eye-opening the market had the ability to reach new highs alongside so much human suffering on many levels. While we place great importance on financial health, we all agree physical and mental health are most important in life. With that in mind, we wish you all a happy and HEALTHY 2021 – physically, mentally and financially. We will continue to be here by your side to help navigate these turbulent times we live in.