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Quarterly Summaries

2020 Quarterly Summaries

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Review of Securities Markets, Fourth Quarter, 2020

U.S. stocks rose sharply during the fourth quarter as investor optimism improved following announcements that coronavirus vaccines had been effective in drug trials. U.S. stocks fell during the month of October but began to rally the first week of November after trials of these vaccines were found to be more than 90% effective. The U.S. Presidential election had also been a source of concern to investors given the contentious nature of the campaign, but concluded without incident. Despite the decline in October, the S&P 500 Index1 finished the quarter up 12.2% and ended the year with a gain of 18.4%.

While all major U.S. industry sectors registered gains during the quarter, sectors that had previously underperformed for most of the year were particularly strong over the last three months of 2020. This rotation into weaker-performing assets was primarily driven by the rollout of the coronavirus vaccine as investors began to anticipate a return to normal economic activity. The Energy and Financial industry sectors were the best-performing sectors for the quarter by a wide margin, after lagging the market earlier in the year. Value stocks and the stocks of smaller companies, which had also been out of favor, outperformed the S&P 500 Index during the quarter. The Russell 1000 Value Index2 rose 16.3% while the Russell 2000 Index3 of small company stocks registered a gain of 31.4% during the quarter.

Foreign stocks also rose sharply during the fourth quarter as coronavirus vaccines were approved in various countries. In addition to the price gains, foreign stock returns were boosted by a decline in the value of the U.S. dollar relative to many other currencies. The MSCI AC World Ex U.S. Index4, a broad index of foreign developed and emerging market stocks, rose 17.0% during the quarter. Strong returns were relatively consistent across the globe with 47 of the 49 countries in the index ending the quarter with a positive return. Emerging markets, as measured by the MSCI Emerging Markets Index5, outgained developed markets with a gain of 19.7% for the period. Similar to the U.S., foreign value stocks and the stocks of smaller foreign companies outperformed the broader foreign stock index during the quarter.

Returns in the U.S. bond market were mixed during the quarter. The broad U.S. high-quality bond indexes generated modestly higher returns, mostly due to gains in investment grade corporate bonds. The Barclays Aggregate Bond Index6 rose 0.7% in the fourth quarter while the Barclays 1-5 Government/Credit Index7 gained 0.3%. The advent of a coronavirus vaccine led to higher inflation expectations which led to a rise in Treasury yields and a decline in Treasury prices. The Bloomberg Barclays U.S. Treasury Index8 declined 0.8% during the quarter. The increase in inflation expectations provided a tailwind for U.S. Treasury Inflation Protected Securities (TIPS)9, however, which rose 1.6%. Optimism around the vaccine was positive for corporate debt given the expectation that corporate finances should improve once the economy normalizes. The Bloomberg Barclays U.S. Credit Index10 rose 2.6% during the quarter.

Zero to Sixty in Five

The quickest car that has ever been produced for retail use on public roads is the 2015 Porsche 918 Spyder which can go from zero to 60 miles per hour in 2.5 seconds. For some perspective, the most popular sedan sold in the U.S. (Toyota Camry), takes approximately 7 seconds to go from zero to 60. Car enthusiasts have generally settled on a time of 5 seconds as the cutoff for whether a car should be defined as ‘quick’. If we were to use a similar lens to consider price movements in investment markets in 2020, it would be clear that this past year resembled a Spyder far more than a Camry. Large price changes in many markets, both up and down, were historically steep and quick. Some of the speed with which the markets moved made sense given the quick and severe economic impact of the coronavirus, but there was also a significant increase in speculative behavior that drove sharp moves during the year.

It seems like a long time ago but the year started with a modestly increasing stock market that reached an all-time high on the S&P 500 Index in late February. As news of the coronavirus and the ensuing lockdowns spread, the U.S. stock market encountered its fastest bear market in history with the S&P 500 Index dropping 20% in just 16 trading days. Stocks continued plummeting from there, reaching a 30% decline just six trading days later which marked the fastest 30% drop on record. Once it became clear that the decline in economic activity would be supported by record-setting fiscal and monetary stimulus, the market rallied 38% in just 50 trading days which was also a record. But the dramatic price swings extended well beyond the S&P 500 and beyond the first half of the year as well. For example, the Russell 2000 Index of smaller U.S. companies rose 18% during the month of November, which was the highest monthly return in the history of the index. It wasn’t just equities either as record-breaking price changes occurred in bond and commodities markets as well. During a 3-day period in April, the price of crude oil futures gyrated from about $20 per barrel to -$40 per barrel (not a typo) before rebounding back to about $15.

In many cases the excessive price swings were due to news relating to the pandemic, but there was also a significant increase in speculative trading activity during the year. Some people who were bored from lockdowns discovered the ‘fun’ of options trading which contributed to record-breaking trading volumes in the options market. Margin debt also ended the year at an all-time high. There were also plenty of examples of stratospheric moves in individual assets that traded well above any reasonable measure of value. Two of the more extreme examples were shares of Tesla, which rose 743% during the year and Bitcoin which rose almost 500% over the last nine months of 2020.

So should investors be concerned about the increase in volatility and speculative activity that was prevalent in 2020? Let’s just say that there is a reason that it is more expensive to insure a Porsche Spyder than a Toyota Camry. The faster things move, the higher the probability of an accident. The strong rallies in some assets and asset classes have led to rich valuations that may lead to price declines at some point down the road, but no one knows for sure when and if that will happen or how steep the declines may be. The best insurance against these types of declines is a carefully considered investment plan that you can stick with no matter what obstacles lie in the road ahead.

Written by Jeffrey Blanchard, CFA, Director of Research; [email protected]

Quarterly Review of Securities Markets: Total Return

IndexMarket109/30/20 – 12/31/202020
Standard & Poor’s 500Large Co. U.S. Stocks12.2%18.4%
Russell 1000 ValueLarge Co. Value U.S. Stocks16.3%2.8%
Russell 2000Small Co. U.S. Stocks31.4%20.0%
MSCI All-Country World ex U.S.Foreign Stocks17.0%10.7%
Barclays 1-5 Year Gov’t/CreditU.S. Shorter-Term Taxable Bonds0.3%4.7%
Barclays Aggregate BondU.S. Taxable Bonds (Broad-based)0.7%7.5%
Barclays 1-5 Year Muni BondU.S. Shorter-Term Tax Exempt Bonds0.3%2.8%
JPMorgan Global Ex-U.S. Bonds11  Hedged Foreign Bonds0.8%4.4%

Securities Markets Return Data Source: Morningstar

Key Economic Indicators

  • The latest U.S. GDP growth figures (third quarter 2020) showed the economy grew at a record pace of 33.4% on an annualized basis. This growth offset a majority of the decline in economic growth earlier in the year. The first estimate of fourth quarter GDP will be released in late January and consensus expectations are for economic growth to have contracted by 2-3% on an annualized basis for the entirety of 2020. The first estimate of fourth quarter GDP will be released in late January and consensus expectations are for economic growth to have contracted by 2-3% on an annualized basis for the entirety of 2020.
  • U.S. employment data for December showed a decline in U.S. payrolls due primarily due to the spike in coronavirus infections. Nonfarm payrolls dropped by 140,000 in December, which was the first decline in payrolls since April. The unemployment rate in December was 6.7%, unchanged from the prior month. The unemployment rate remains elevated and is far above the 3.5% rate reached before the pandemic. Economists expect the unemployment rate to remain in the 5%-7% range from now until the end of 2022.
  • The latest report on U.S. inflation (Consumer Price Index) showed an inflation rate of 1.2% in November versus the same month a year ago. The Core Consumer Price Index (CPI less food and energy) posted an annual increase of 1.6%. Both measures of inflation were unchanged from the prior month’s report.
  • The Bloomberg Commodity Index12 gained 10.2% during the fourth quarter. The price of crude oil reached $49 per barrel at the end of December, rising 21% during the quarter. The price of gold fell marginally during the quarter, ending the year at $1,849 per ounce.

Key economic indicators compiled by Jeffrey Blanchard, CFA, Director of Research; [email protected]

Footnotes:

1. S&P 500 Index: A market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. An index is unmanaged and not available for direct investment.

2. Russell 1000 Value Index: A market capitalization-weighted index composed of constituents in the Russell 1000 Index with low price to book ratios and lower forecasted growth rates. An index is unmanaged and not available for direct investment.

3. Russell 2000 Index: A market capitalization-weighted index of U.S. small cap stocks that consists of the 2,000 smallest publicly traded stocks in the Russell 3000 Index. An index is unmanaged and not available for direct investment.

4. MSCI World ex US Index: A market capitalization-weighted index that captures large and midcap companies in developed countries excluding the U.S. An index is unmanaged and not available for direct investment.

5. MSCI Emerging Markets Index: A market capitalization-weighted index that captures large and midcap companies in emerging market countries around the world. An index is unmanaged and not available for direct investment.

6. Bloomberg Barclays US Aggregate Bond Index: A broad-based bond index that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government agency bonds, corporate bonds and securitized fixed income securities. An index is unmanaged and not available for direct investment.

7. Bloomberg Barclays 1-5 Year Gov/Credit Bond Index: A broad-based bond index that measures the non-securitized component of the US Aggregate Bond Index and targets bonds with maturities between 1 and 5 years. An index is unmanaged and not available for direct investment.

8. Bloomberg Barclays US Treasury Index: An index that measures US dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury. An index is unmanaged and not available for direct investment.

9. Bloomberg Barclays US TIPS Index: An index that measures the performance of the U.S. Treasury Inflation Protected Securities (TIPS) market. The index excludes any inflation protected securities held by the U.S. Federal Reserve. An index is unmanaged and not available for direct investment.

10. Bloomberg Barclays US Credit Index: An index that measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate bond markets. An index is unmanaged and not available for direct investment.

11. JPMorgan Global Non-US Government Bond Index Hedged: An index constructed of government bonds issued from developed countries outside the U.S. with the currency exposure hedged backed to the U.S. dollar. An index is unmanaged and not available for direct investment.

12. Bloomberg Commodity Index: This index reflects the return of a broad basket of commodity futures contracts with the collateral invested in 3 month Treasury Bills. An index is unmanaged and not available for direct investment.

Disclosures:

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