What a year - 2020! The market achieved record highs near year-end despite a collection of intertwined seismic events during the period - the worst global pandemic in a century, resulting in profound changes in our way of life, massive reactive policy shifts, presidential election controversy, “warp-speed” medical innovations, the most rapid materialization of a bear market on record, and among the largest and most rapid market recoveries in history. Yet, with the recent development and distribution of vaccines, accommodative and stimulative policies around the globe, and the likelihood of a divided US government; there looks to be light at the end of the tunnel and the prospects for global economic recovery appear to be on the upswing setting the stage for a constructive and hopefully more normal 2021.
While the market ended up for the year, 2020 was marked with intense volatility. Reacting to the most profound health crisis in a century, the year featured the onslaught of the most rapid “bear market” (a decline of 20% or more) on record. Blackrock research sites that in just 23 trading days following the market hitting new highs on February 19, the S&P 500 declined 34%! In March alone the market was up or down more than 4% eight separate times! In comparison there were only 6 such days in 1929 during the Great Depression, and the annual average of plus or minus 4% days over the past 90 years is just 3.2 days. From its lows the market rallied some 65% to new highs, and by year-end the S&P 500 was up about 18.4%, well above the historical average of about 11%. The US Bond market (Bloomberg Barclays US Aggregate Bond Index) was up 7.5% (through November), and well above underlying prevailing interest rates. A typical 60/40 portfolio generated a very solid 14% return.
Looking into 2021, challenges remain but there are reasons for optimism. The number of Covid cases had been trending higher – again triggering lockdowns; but vaccine deliveries have begun, a second round of stimulus has been put in place, and policies should remain supportive of growth. These conditions suggest an economic re-start as a solid base-case, although a traditional business cycle analysis does not apply in the wake of the Covid shock, which is more akin to a natural disaster. The pace of recovery will be driven by what Vanguard terms the immunity gap, which is the percentage of the population lacking immunity - and the reluctance gap, which is the percentage of the population reluctant to engage in economic activity. Beyond these near-term issues, the pandemic is expected to impact megatrends – like health and technology innovation, digitization, productivity, globalization (some terming it as “slowbalization”), and sustainability.
More specifically, conditions for equities are favorable with opportunities in Small-cap companies, selected cyclicals and emerging markets. A willingness for central banks to let economies “run hot” suggests higher growth, and with it the potential for inflation. Meanwhile, aggressiveness on the policy front leaves less “dry powder” for reaction to other unforeseen crises. On the fixed-income side, with interest rates and yields at the low-end of a realistic range, and recent bond returns above prevailing interest rates, it’s hard to see bonds sustaining the performance achieved in 2019 and 2020. Bonds are more likely to earn returns close to their current yield levels.
With this backdrop, investors are encouraged to review their portfolios to insure allocations are aligned with goals, objectives, and risk-tolerance. Attention should also be given to sector, style, and geographic opportunities in equities and the size and role of fixed income positions. Finally, and perhaps above all, there is hope that the human condition will improve in 2021.