News & Insights
Fourth Quarter 2020 Market Commentary
There is no doubt that 2020 was an extraordinary year. As we reflect on the year, we would be remiss if we did not express our deepest sympathies to those affected by the Covid-19 pandemic and offer our most sincere gratitude to the doctors, nurses, and frontline workers who have worked tirelessly for the rest of us during this health crisis.
2020 Market Recap:
The S&P 500 finished the year with a total return of 18.40%, while this performance is well above the historical average, the ride to get there was anything but normal. In fact, 2020 brought us two extremes; the fastest ever bear market with a market decline of 33% over just a 22 day period, but also the fastest ever recovery with a historic 70% rebound off of the March lows.
Although the total return of the S&P 500 was strong, there were large disparities amongst sectors. Information Technology closed the year up 41.2% while the energy sector finished the year down -37.5%.
International stocks also ended the year on a high note. The MSCI Emerging Market index was up 18.31%. Both the weakening US Dollar and the ability of Asian Regions to curb the spread of the virus were significant factors in contributing to equity performance.
Though not as strong, developed international stocks also ended the year on the plus side. The MSCI ACWI ex-US Index was up 10.65%. Much of this performance came in the 4th quarter following the announcement of the development of a successful vaccine.
Lastly, fixed income investments served their intended purpose as diversifiers in portfolios. The Bloomberg Barclays U.S. Aggregate bond index ended the year up 7.5%. Supported by accommodative monetary policy, the index of U.S. Treasuries was positive throughout the year. After a negative first quarter, the Corporate High Yield index also finished the year up 7%.
Investors who remained diversified across stocks and bonds benefited from owning a mix of asset classes.
Looking ahead to 2021:
After what has been one of the most difficult years in modern history, we enter 2021 with renewed optimism for a robust economic recovery.
With COVID-19 cases peaking again, there will be continued pressure on many service industries during the first half of the year. The development of multiple vaccines provides hope that a return to normalcy is not too far off. We expect economic growth to surge in the second half of the year as these service-oriented businesses safely reopen and meet pent up consumer demand that accumulated over the past year. Already we are seeing the stocks in these areas perform well in anticipation of a meaningful recovery.
From a broad corporate earnings perspective, the worst of the recession is behind us. Corporate earnings will continue to rebound through 2021, but analysts do not expect profits to exceed the 2019 peak until sometime in 2022. Many analysts expect that earnings and profits in sectors hardest hit by the pandemic; including energy, financials, and industrials will have a solid earnings rebound this year, while areas like technology and healthcare should continue to perform well.
In addition to the economic recovery accelerating, the Federal Reserve remains committed to supporting the ongoing economic recovery. During the December meeting of the Federal Open Market Committee (FOMC), officials provided guidance reiterating their commitment to providing liquidity and keeping interest rates low for as long as needed.
As illustrated in the chart below, the Fed’s balance sheet has nearly doubled in 2020 to $7.4 trillion and is expected to remain elevated through at least 2022. This increased liquidity should keep interest rates low for longer which will continue to support risk assets over the intermediate term.
It should be noted that our constructive view on the markets do not come without risk. Valuations of certain stocks and industry areas are stretched. We would not be surprised to see volatility in these names throughout the year related to profit taking or changes in investor sentiment.
As in past years, there is always a chance geopolitical and trade tensions flare up as was the case in 2019.
Though we expect President Biden to take a measured and thoughtful approach to dealing with China, he has made it clear that he will not ease existing tariffs immediately and certainly not without concessions from China on issues like intellectual property rights and environmental and labor issues. There is also the possibility for renewed U.S. tensions with North Korea and Russia.
Lastly, the massive monetary and fiscal stimulus, while necessary, could have negative consequences over the long term if deficits are ignored indefinitely. While it will be necessary to tighten monetary and fiscal spending, tightening too quickly could slow the recovery.
2020 was an extraordinary year and it should serve to humble investors. Risk is not always obvious or foreseen, which is why it is crucial to create diversified investment portfolios tailored to your personal goals and tolerance for risk.
One of the greatest lessons of 2020 is the inability of anyone to successfully time the market. 2020 reinforced that diversification across different asset classes and sectors prevents investors from making detrimental investment decisions that can derail their long term investment plans. Staying invested and sticking to a long-term investment plan will win every time.
The Information contained in this document is based on data received from third parties which we believe to be reliable and accurate. YorkBridge Wealth Partners, LLC has not independently verified the information and does not otherwise give any warranty as to the truth, accuracy, or completeness of such third party data, and it should not be relied upon as such. Any opinions expressed herein are our current opinions only. YorkBridge Wealth Partners, LLC is an SEC Registered Investment Adviser under the Investment Advisers Act of 1940 (“Advisers Act”). Registration of an investment advisor does not imply any specific level of skill or training. The information contained in this document is to assist with general planning. Please consult with your own tax advisor and attorney for more specific information.