Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Weekly Market Performance Snapshot (Week ending December 18, 2020 & Year-to-Date)
- Dow Jones Industrial Average®: +0.4% / +6.0%
- S&P 500® Index: +1.3% / +14.8%
- NASDAQ Composite® Index: +3.1% / +42.2%
- Russell 2000® Index: +3.0% / +18.1%
- 10-year U.S. Treasury note yield on December 18, 2020: 0.95%
- Up 6 basis points from 0.89% on December 11, 2020
- Down 97 basis points from 1.92% on December 31, 2019
- Best-performing S&P 500 sector this week: Technology, +3.2%
- Weakest-performing S&P 500 sector this week: Energy, -4.3%
Past performance is not a guarantee of future results.
Looking back at 2020
Volatility was the watchword for markets in 2020. Equity markets started the year strong, setting new highs in February. The benchmark 10-year Treasury yield was near 2%. Then the coronavirus pandemic turned the world upside down. From the end of February through late March, equities experienced the fastest-ever decline into bear market territory, while Treasury yields plummeted as investors sought safety in government bonds. Remarkably, all major indices are set to close the year in positive territory.
- Fiscal and monetary stimulus paved the way for the market rebound. Beginning in March, Congress and the President agreed to multiple fiscal stimulus packages totaling more than $3 trillion, representing unprecedented levels of federal support for the economy that far eclipsed the rescue packages enacted during the great financial crisis of 2007-08. The stimulus spending pushed U.S. GDP growth to a record 33.1% in the third quarter, following a record 31.4% decline in the second quarter.
- The Federal Reserve acted aggressively in March to support the economy by lowering the federal funds rate to a range of 0-0.25% and ramping up asset purchases. The Federal Reserve provided liquidity to multiple asset classes, including Treasuries, mortgage-backed securities, and commercial paper. These moves, along with virus fears and economic pessimism, pushed the 10-year Treasury yield to all-time lows this year.
- The energy sector was hit especially hard during the year, as global travel ground to a halt. Oil prices reached near-20-year lows, and at one point the spot price for oil futures contracts fell below zero (meaning sellers were paying buyers to take the contracts off their hands).
- Economic and political tensions between the U.S. and China roiled markets throughout the year, as the U.S. government responded to concerns about the Chinese government’s authority over Chinese tech firms and its effort to exert more direct control over Hong Kong.
- Technology stocks and the tech-heavy NASDAQ Composite flourished this year as investors sought companies such as Amazon, Zoom, and Peloton that benefitted from people spending much more time at home. The NASDAQ Composite is up more than 40% in 2020.
- Global equity markets notched their biggest increase in November since 1975, as vaccine trial results gave investor optimism a proverbial shot in the arm. The 10-year Treasury yield also came close to 1%—still historically very low, but substantially higher than the 0.5% lows reached earlier in the year.
- All major U.S. indices reached record highs in November, and cyclical stocks—which stand to benefit from a normalizing economy—finally got wind in their sails. Through November 30, the Russell 1000 Growth Index returned 32.4% this year vs. a loss of 1% for the Russell 1000 Value Index. However, from September 1 through November 30, the Russell 1000 Value Index returned 9.2% vs. 1.5% for the Russell 1000 Growth Index.
- As the year closes and the country suffers the economic effects of another wave of the coronavirus, Congress is trying to agree on a new $900 billion economic relief package. At its December meeting, the Federal Reserve reiterated its commitment to keeping rates low. Governments and central banks around the world likewise continue to inject massive amounts of liquidity and fiscal support into global economies.
- Market enthusiasm may be running ahead of economic fundamentals. While the third quarter saw a record rebound, economic growth is still likely to be negative for the year. The fourth quarter is being battered by virus-induced economic restrictions. New jobless claims have risen for two consecutive weeks, and retail sales posted a decline in November—traditionally one of the best shopping months of the year. The promise of additional federal fiscal relief and vaccine optimism continues to push equities to new highs, but it’s unclear whether the U.S. economy in 2021 will generate strong enough growth to support these valuations.
Looking ahead to 2021
The hope for 2021 is that vaccine distribution in the U.S. and abroad will allow a return to sustained economic growth, with unemployment levels ebbing, remote workers returning to offices, and people resuming normal life activities. How quickly that happens remains to be seen. Most of the U.S. population could be vaccinated by the middle of next year, assuming all goes well with vaccine production, distribution, and the public’s willingness to be vaccinated.
- It’s possible that GDP in the first quarter of 2021 will be negative, because vaccine rollouts will be incomplete, and the winter season portends high virus counts. But GDP is likely to rise in later quarters, assuming we don’t see backsliding on the virus front.
- Equity markets could stall next year, given the high degree of optimism reflected in current valuations. However, liquidity remains high, with a great deal of cash still on the sidelines waiting to be deployed, potentially driving further stock price appreciation in 2021.
- Small caps, value stocks, and emerging market stocks all stand to benefit from global economic normalization. Will this come at the expense of technology stocks? Given the amount of cash on the sidelines and the high quality of many tech names, including Apple, Amazon, Google, and Microsoft, the technology sector may sustain strong growth, though perhaps not at the same torrid pace as this year.
- Tech companies that are more dependent on the stay-at-home trade face other questions. How will Zoom fare if people go back to offices? Will Peloton keep pedaling forward when gyms reopen? And will DoorDash, which recently went public, continue to thrive when people go back to restaurants? All three companies—and many similar stocks—have high valuations now and will require robust revenue and earnings growth to move their stock prices higher.
- While the Federal Reserve plans to keep the federal funds rate at 0-0.25% at least through 2021 and probably through 2022, market interest rates, such as the 10-year Treasury yield, are likely to drift higher in the new year. The enormous amount of liquidity the Federal Reserve has added to the system would make it difficult for rates to rise too quickly, but a 10-year Treasury yield in the 1–1.25% range is not out of the question.
- The 10-year Treasury yield influences consumer lending rates, including mortgage rates. A rapidly rising 10-year yield may require the Federal Reserve to intervene in markets more aggressively if it determines that the economy still needs time to fully recover from the pandemic.
- The U.S. dollar has been falling against other major currencies. Loose monetary policy from the Federal Reserve and hopes for the global economic recovery may extend this trend in 2021. A falling dollar could create a good opportunity to own international assets.
- Public policy from Congress and the incoming Biden administration is likely to focus almost exclusively on vaccine distribution and pandemic recovery for the first half of the year. Democrats have already signaled their intention to build on any December stimulus agreement with an additional package early in 2021. This would likely buoy markets. However, if Republicans maintain control of the Senate after the Georgia runoff elections, we’re likely to see a continuation of the same stimulus dynamics we’ve seen in recent months.
- Greater bipartisan agreement exists around U.S.-China relations. While the Biden administration may take a more multilateral approach to dealing with China over trade and geopolitical disagreements than the Trump administration has, expect continued tensions in 2021, with the potential to add volatility to markets.
- We’ll also continue to see bipartisan agreement around the need to regulate large tech companies—though specific approaches may differ between and within the two parties. Two coalitions of states filed antitrust lawsuits against Google in the past week, following recent federal lawsuits against Google and Facebook. These companies also face international pressure, particularly from European Union regulators. This could be a headwind for Big Tech throughout 2021 and beyond.
- Innovation in areas such as technology, health care, and clean energy present future opportunities for long-term growth that investors may wish to explore.
Final thoughts for investors
- 2020 offered further support for the old adage “time in the market is more important than timing the market.” Few would have predicted stocks’ harrowing roller-coaster run this year. Many investors who fled equities in February and March now wish they had stayed in the market. But now isn’t the time for regrets or fear of missing out. Now is the time to speak with a financial professional about your long-term investing goals and decide how best to position your portfolio for the range of outcomes possible in 2021.
The market commentary will return in January 2021.