Fourth Quarter Market Update: The Far-Reaching Impact of COVID-19

Written by John B. Cox, CFA, CAIA on January 6, 2021

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Year 2020 was like no other. An internet search for best songs to describe the year included: “Help” by The Beatles, “Don’t Stand So Close to Me” by The Police and “From a Distance” by Bette Midler. The terms “social distancing” and “face coverings” became part of our vocabulary.

COVID-19’s impact was far-reaching—public health, global economy, capital markets, social media, politics, etc. This commentary will focus on the two aspects we closely monitor: the economy and the capital markets. The substantial decline in U.S. economic activity hit its trough during the second quarter, and while it was one of the worst quarters ever, it was very short-lived, and the rebound began immediately. The Federal Reserve’s approach to keeping interest rates extremely low, as well as providing stability and liquidity to the asset markets, enabled investor confidence to avoid the worst-case scenario that was experienced in the financial crisis that occurred in 2008. Additionally, the Treasury Department and Congress provided stimulus in the early days of the pandemic, and these measures helped prevent a further collapse in consumer spending, which makes up 70% of our economy. At one point, the projections estimated a U.S. decline of 5%-10% for the full year (more than a $1 trillion downturn), but now the contraction is expected to be less than 5%, which will mean there’s not as big of a hole to dig out of in 2021 and future years. Unemployment peaked at around 15% and has recovered to a level below 7%. While the pace of economic gains will likely be moderate in 2021, there is still enough momentum to continue growing.

Investment markets typically anticipate moves in the economy; therefore, stocks began declining in February, before the economic damage occurred. Also, as you might expect, stocks began recovering in late March/early April—when the economic shutdown was still occurring. The investment markets were looking past the temporary decline in activity and looking forward to the recovery in corporate earnings. This behavior is another example of why it is almost impossible to “time the market.” Amid spiking unemployment, business uncertainty and general pessimism, the stock market rebound ensued, and every month from April to August was a positive one for global stocks. September and October represented a cooling-off period for the markets as election day approached and volatility picked up. The possibility of a long, drawn-out contested election or a clean sweep that might not be favorable for corporate profits and tax policy weighed on the minds of investors. Thankfully, the “Santa Claus rally” came early this year with optimism about effective vaccines driving stocks higher in November and December.

In terms of actual market performance, the fourth-quarter results were very strong. U.S. large company stocks (S&P 500) and mid-cap stocks (Russell Mid Cap), appreciated by 12.1% and 19.9%, respectively, while the Russell 2000 Small Cap index was the top performer at +31.4%. International stocks in the developed markets of Europe and Japan (MSCI EAFE index), also shined, returning 16.0% but not quite keeping up with the 19.7% gain in the MSCI Emerging Markets benchmark. The bond market was slightly positive with a 0.7% return, based on the Barclay’s Aggregate index.

Looking ahead in 2021, there are still uncertainties, such as whether further stimulus plans (economic relief, infrastructure spending, etc.) will come to fruition, as well as vaccine adoption/effectiveness and potential gridlock in Washington. Many years of market history have taught us that long-term investment results are driven by corporate earnings, valuations and interest rates. While we can’t predict if 2021 will be a good year or a bad one, there is reason for optimism for those who have at least a three- to five-year time horizon. Happy New Year!


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