What a year 2020 has been. We saw market volatility reach an historic high in March with the CBOE VIX Index registering a level of 82.69. This was the highest level ever recorded topping the 80.86 number recorded during the financial crisis in 2008. Investors surely felt uneasy while riding through the ups and downs this year. However, in the end, simply remaining invested provided a solid rate of return, with all major indexes ending positive. The markets continue to look forward to a return to normalization given the rollout of an effective vaccine, additional governmental stimulus and an accommodative Federal Reserve.
U.S Stock Market
U.S. stocks, as measured by the S&P 500 Index, rose 12.15% for the quarter finishing the year with a strong rally. Mid and Small Cap companies performed extremely well in the final quarter returning 24.37% and 31.37%, respectively, as measured by the S&P Mid Cap 400 and Russell 2000 Index. These smaller companies performed the worst in the first quarter and recovered slower than the larger companies within the S&P 500, but finally shot up with their indexes turning strongly positive for the year.
On the year, the U.S. broad market returned 18.4% despite enduring a 34% drop from peak to trough in March. Staying invested rewarded investors who maintained their equity positions through the downturn, as the fastest recovery ever from a bear market ensued.
International Stock Markets
Developed international stocks advanced 16.05% for the quarter as seen by the EAFE Index. Emerging market stocks performed a bit better posting an impressive 19.70% gain. While much of this gain is due to economic recovery, some of it is also attributed to the decline of the U.S. dollar, which lost over 4% for the quarter.
Europe has been hit hard by the current wave of the Coronavirus. In response to these rising cases, several countries have implemented new lockdowns or restrictions. The U.K. has been hit particularly hard and a more transmissible variant of Covid-19 has been identified. U.K. Prime Minister Boris Johnson announced a new lockdown for England that is similar to what was experienced in March of 2020, requiring people to shelter in place except for a handful of permitted reasons, and schools have returned to an online format for most students. If more countries impose lockdowns throughout Europe, volatility in the markets should be expected.
Bond & Credit Markets
The Aggregate Bond Index returned a marginal 0.67% gain for the quarter. Bond yields rose slightly through the quarter, however, the Fed expects to keep its key interest rate near zero all the way through 2023 as the economy recovers. One of the goals for the Fed is to achieve maximum employment and while stock markets are forward looking, then employment rate, a lagging economic indicator, sits around 6.7%. It will likely take years for the economy to fully recover from the pandemic.
The yield curve steepened throughout the quarter which is another sign of recovery. Still, interest rates remain very low with the 10-year U.S. Treasury only yielding .95% on December 31st. As of this writing, the 10-year has moved sharply to 1.08%.
Oil Prices & Energy Stocks
Oil prices rose roughly 20% for the quarter. This is likely due to the weakening dollar and expectations that demand for oil will increase in 2021 as vaccines roll out and more travel occurs. Energy stocks gained 16.26% in the 4th quarter trimming their annual loss to 10.84% for the year. Saudi Arabia said it would unilaterally cut 1 million barrels a day of crude production starting next month, a surprise move signaling the Kingdom’s worry that a resurgent coronavirus is threatening global economic recovery.
Despite some obvious risks in the market today, it’s worth noting that a typical bear market (a drop of more than 20%) rarely occurs quickly after a previous drop of this magnitude with the average bull market lasting 4.5 years. While actual results will likely deviate from this average, hope in the form of vaccines could allow the world to recover in 2021 and beyond. Historically a steep rise in stock prices in November and December bodes well for the following
year. Per LPL research, there have been 5 times that the S&P 500 Index rose more than 10% during November and December. In the subsequent year, stocks averaged a gain of more than 18%. So while certain risks from the global pandemic remain, the potential for additional return is still present given that we are now in the early stages of a recovery.
CRA Investment Committee
Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC®
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