Quarterly Newsletter for the 4th Quarter 2020
Despite the trials and tribulations of last year, the markets finished on a positive note. On a price return basis, the Dow Jones Industrial Average (DJIA) finished the year up 7.25%. The Standard and Poor 500 (S&P 500) was up 16.26%, and leading the pack, was the tech heavy NASDAQ, finishing the year with an impressive gain of 43.46%. Overseas, the MSCI all Country World ex-US Index was up 10.65%, while the MSCI Emerging Market Index had a gain of 15.37%. In the fixed income environment, the Barclays Merrill Lynch 3-month Treasury Bill Index showed a slight return of 0.67% for the year.
Fixed Income Market (Bonds): Things have not changed much since the Fed lowered rates to zero back in March of 2020. As reported in our earlier newsletters, the Fed has entered another round of Quantitative Easing, purchasing an enormous amount of Treasury Bonds and mortgage-backed securities. It has added a tremendous amount of liquidity to the markets. Additionally, the Fed is maintaining their accommodative stance and has reinforced their prediction of not raising interest rates through 2022. While long-term interest rates could drift upwards, central banks should keep short term rates low; thus, facilitating fiscal stimulus. Considering the above, we continue to see little change in the fixed income market in the foreseeable future.
US Equity Market (Stocks): The Coronavirus seems to be the single largest factor affecting the stock market today. Presently, we are amid a “K-shaped” recovery. In March of 2020, we witnessed a market correction as the country was basically shut down, unemployment soared, and the world panicked. This drop in the market was followed by a partial reopening and rebound in the summer and led to a scenario where some stocks (the pandemic winners such as home workout equipment, mask producers, and tech companies) did extremely well and others (the pandemic losers such as gym memberships, entertainment venues, and restaurants) did poorly. With the introduction and distribution of the vaccine, these sectors are showing some signs of converging. It is certainly possible that, in the short term, we could see another mild market correction. We believe it will be short lived and focused on the “pandemic winners”. As we approach “herd immunity”, the country will open further, consumer spending (that historically made up approximately 85% of the U.S. economy) will accelerate and we believe that we will see positive results in the market. The government has approved a second stimulus package and the new Biden administration is now pushing for a third. Consumer savings, speared by the stimulus checks and reluctance/inability to spend them, has reached all-time highs. Once the country is back to normal, this money should flow quickly in the system, the economy will strengthen, corporate earnings will improve, and corporate valuations will increase. All positives for a successful year in the stock market.
Overseas Equity Market (Stocks): The Coronavirus is affecting countries all around the world in much the same way as it is affecting the U.S. International growth will depend on regional pandemic trends early in the year but should broadly accelerate once the vaccines are distributed. Overseas equities may benefit from the falling dollar and the more accommodative attitude of the Biden administration. As we stated before, overseas equities are drastically undervalued as compared to U.S. stocks. Thus, we continue our positive stance on international stocks and think they will generate positive returns this year.
Conclusion: There is still an enormous amount of cash sitting on the sidelines- waiting to be invested. With interest rates as low as they are, equities appear to be the investment of choice. The Coronavirus may continue to cause some short-term issues, but the U.S. and the overseas stock markets are positioned to finish the year on a positive note. Again, we believe that both markets may show some volatility, but over the long-term, return positive results. Interest rates will remain extremely low for the foreseeable future.