The final chapter of 2020 was dominated by the election, jousting over a second stimulus package and the roll out of COVID-19 vaccines. The vaccine news and the anticipation of an eventual return to normal economic activity powered the U.S. Stock Market to new highs. Surprisingly, small cap stocks had the strongest performance in the 4th quarter and ended nearly as strong as larger stocks in 2020.
Large caps stocks as reflected by the CRSP Large Cap Index rose nearly 13% in the 4th quarter and ended the year up over 21% in 2020.
- Small cap stocks as reflected by the CRSP Small Cap index were up over 27% for the 4th quarter and ended the year up over 19% for the year.
The markets continued to transition away from the technology-powered rally of the spring and summer and look towards a broader post-pandemic economic recovery. The sectors of the market that struggled early in the pandemic such as the financial, energy, and industrial sectors seemed to have turned a corner and were among the top performers in the final three months of 2020.
International stock markets were also positively influenced by the vaccine news and rallied enough in the 4th quarter to largely end the year where they started. An exception was Japanese large cap stocks, which had a very strong rally aided by Bank of Japan equity purchases. The Nikkei 225 stock index has reached levels not seen since the early 1990’s. Also, there was positive news out of Europe as Great Britain and the European Union finally agreed to post-Brexit trading rules some four years since that historic vote. Emerging markets also experienced a good quarter powered primarily by Asian countries that have done a decent job of containing COVID-19.
The MSCI All Country-ex U.S. equity index rose nearly 17% in the 4th quarter and ended the year up .01%.
- The MSCI Emerging Markets Index was up over 19% in the 4th quarter and up .04% for the year.
Overall, U.S. bond investors saw a small positive return in the 4th quarter. The 10-year treasury yield moved up slightly as investors decided that perhaps the worst was over and started looking for better returns. In response, yields on corporate bonds dropped on the increased demand. Overall bonds did well in 2020 but those results mean that bond yields remain very low.
The Bloomberg Barclays US Aggregate bond index rose 0.67% in the 4th quarter and 7.51% for 2020.
Federal Reserve Chairman Jerome Powell reiterated the Fed’s intention to keep interest rates near 0% in his December press conference. The Fed Chairman also said that the Fed intends to continue purchasing billions of dollars of U.S. Treasury and mortgage bonds to maintain bond market stability while also injecting more money into the economy.
The economic recovery continued to lose energy as the colder weather and COVID-19 resurgence combined to induce a new round of business shutdowns. The unemployment rate remains elevated particularly for service workers and those without a college degree. The $900 billion aid package passed in December is not likely to do much stimulating of the economy but will help struggling families and small businesses get through the winter. The timing of a full-fledged economic recovery remains dependent on how quickly at least half of the U.S. population can get vaccinated and social distancing fades away.
More than anything, the unpredictable nature of the past year reinforces the importance of being prepared for the unexpected. Doing things such as maintaining a cash reserve to cover the uncertain times and having your financial matters organized so others can take control when you cannot. Also, the past year’s remarkable stock market return is a reminder of the importance of a diversified portfolio that allows you to take part in unexpected rallies but lets you sleep at night when the markets pull back. If you are feeling like your financial goals have changed or your portfolio needs reviewing, we are always available to discuss.
The CRSP US Large Cap Index includes U.S. companies that comprise the top 85% of investable market capitalization. The CRSP US Small Cap Index includes U.S. companies that fall between the bottom 2%-15% of the investable market capitalization. The MSCI ACWI-ex U.S. Index represents the performance of large- and mid-cap stocks across 22 developed and 27 emerging markets excluding the U.S. The MSCI Emerging Markets Index represents large- and mid- cap stock performance from 27 emerging market countries. The Nikkei 225 Index measures the performance of 225 large companies in Japan. The Bloomberg Barclays U.S. Aggregate Bond Index represents the performance of a portfolio consisting of U.S. Treasury, mortgage-backed, and corporate bonds with a term of approximately 5 years to maturity.
The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.