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Market Commentary

Year-End 2020 Market Commentary and 2021 Outlook The Great Beyond (the Pandemic)

Data Source: Bloomberg

To read full commentary, click here.

4Q2020 Highlights:

• Global stocks, as represented by the MSCI All-Country World Index (ACWI), rose 14.7% for the quarter led by MSCI Emerging Markets and Asia Pacific ex Japan (+19.7% and 19.1%, respectively) followed by MSCI Europe (+17%), MSCI Japan (+15.3%) and the S&P 500 (+12.1%).
• 4Q2020 started off on tenuous footing following the sharp 2Q/3Q rally off the March bear market lows. Global equity markets had weakened earlier in the quarter due to a renewed outbreak in 2nd wave COVID-19 cases.  As temperatures began to drop across the Northern Hemisphere, 2nd wave COVID-19 outbreaks were spreading across both North America and Europe, resulting in renewed social lockdowns and restrictions.
• We then witnessed a strong rally in global risk assets (cyclical equities, speculative corporate and emerging market debt, industrial commodities), following the November U.S. election outcome (gridlock) and reports of high efficacy rates north of 90% for several COVID-19 vaccine candidates.
• The year wrapped up on a positive note when the United Kingdom and European Union avoided a ‘Hard Brexit’ outcome by negotiating a post-Brexit trade deal before the year-end deadline and emergency government approvals for the rollout of the leading COVID-19 vaccines.
• S. dollar weakness throughout the quarter helped contribute to strong international equity and fixed income gains, reflecting both a healthy rebound in global trade activity (the reflation trade) and an accommodative U.S. Federal Reserve committed to maintain zero interest rates and quantitative easing through 2023.
• Emerging market performance masks an increased bifurcation between China (now above 40% of index weight) and broader Asia versus Latin America, Eastern Europe, and Middle East/Africa. The latter is still wrestling with COVID-19 cases and relatively low oil prices while the former is benefiting from a stimulus-fueled recovery in China and global trade flows, especially around technology.
• The ‘K-Shaped’ recovery has resulted in sector ‘winners’ with new technology and online businesses having benefited from the world economy adapting to the virtual remote reality many of us face today versus sector ‘losers’ – traditional businesses such as travel/leisure, restaurants, small/medium enterprises that are struggling to overcome the social distancing restrictions being imposed by local governments to arrest the spread of COVID.
• December had shades of the late 1990s internet bubble as investors bid up initial public offerings from next generation technology companies expected to lose money for the foreseeable future. According to Bloomberg, approximately $180 billion was raised from IPOs on U.S. exchanges in 2020, far outpacing 2019’s record amount and well above the previous high of $102 billion set in 2000 (the apex of the Internet Bubble era).
• S. small caps (S&P 600 Index) recovered sharply, returning 31.3% for the quarter versus 12.1% for U.S. large caps (S&P 500 Index). S&P Pure Value outperformed Pure Growth, returning 25.9% and 15.2%, respectively.
• Among U.S. risk factors, Value was the only factor to outperform the broader market for the quarter. Quality, Momentum, and High Dividend factors performed in line with each other while Minimum Volatility lagged.
• S. fixed income (Bloomberg/Barclays U.S. Aggregate Bond Index) was moderately positive for the quarter returning 0.7% as higher interest rates partially offset the ongoing rallies in corporate bonds as spreads to U.S. Treasury yields narrowed to post-COVID lows. Bloomberg Barclays US High Yield Index rose 6.5%, participating in this quarter’s rally in global equities.
• The 10-Year U.S. Treasury Yield remains near its post-COVID high levels at 0.91% but lingers stubbornly below 1%. The 10-Year Yield started the year at 1.92% before the onset of the global pandemic that saw the yield drop as low as 0.50% in August before grinding higher throughout the remainder of the year.  The U.S. Term Structure (10-Year Less 2-Year Yield) has steepened near its highs and break-even rates between U.S. TIPS vs Nominal Treasuries are implying 2% inflation over the longer term.
• Commodities are also participating in the global risk-on rally with GSCI Commodities Index up 14.5% for the month although gold prices lagged the rally in risk assets. Oil prices have also recovered from their post-COVID lows with the generic 3-month contract priced at just over $48/barrel (it had dropped to as low as $15/barrel during the oil market meltdown in April that saw front-month delivery prices drop to negative $40/barrel).  Real estate has partially recovered but remains this year’s laggard along with financials and energy stocks.
• 2020 witnessed wide dispersion in risk-based assets between technology-focused growth stocks and traditional value stocks (financials, energy). It really was a tale of two markets: growth/momentum on the positive side and value/dividend-focused on the negative side.

To read full commentary, click here.