Many adjectives will ultimately be used to describe 2020, but uneventful will not be one of them. Aside from the horrible loss of life and other physical tolls due to the COVID-19 pandemic, the lockdowns led to unprecedented economic activity throughout the year. The U.S. economy rebounded to post a record 33% annualized growth rate for the third quarter, which followed a 31% contraction in the second quarter (also a record). The wild swings were largely expected due to the impact of the lockdowns, but quarterly GDP is expected to resemble more normal levels going forward. For the full year 2020, the U.S. is expected to show a low-single-digit loss in GDP, the first annual decline since 2009 but perhaps a much better outcome than originally feared.
Given the massive economic swings alongside ever-changing COVID data, the U.S. consumer has stayed resilient, recently helped by positive vaccination news. Consumer spending has shown positive data over the past several months, although a pause appears to be occurring into year-end as federal economic recovery payments begin to wind down. Likewise, consumer confidence is still above early-stage pandemic levels, but recently came in below expectations, dropping to 88.6 in December’s reading from 92.9 reported the previous month. The drop in the December survey was largely attributable to a recent resurgence in COVID cases.
The U.S. labor market has dramatically improved versus the depths reached in the early stages of the pandemic, with the current unemployment rate of 6.7% well below the near-15% level reached at the peak. However, the pace of improvement is moderating as the 4-week moving average of weekly jobless claims has trended higher recently, reflecting the challenges of reopening parts of the economy.
The industrial side of the U.S. economy has generally continued to perform well during the recession, while the normally steady services side of the economy has been challenged. The ISM manufacturing survey has been in expansionary territory since June, with recent readings hovering near multi-year highs. Further, U.S. Durable Goods Orders have been in positive territory for seven straight months. Conversely, the services sector continues to be under stress due to COVID. Bankruptcies are at levels not seen since the aftermath of the financial crisis, while brick-and-mortar retail store closures are expected to join restaurants with a record number of closures for the year.
With mortgage rates near record-low levels, the housing market remains on very solid footing overall. Existing home sales are not far from peak 2005/2006 levels, and the supply of single-family homes for sale remains tight. In fact, sales of existing home have slowed in recent months primarily due to limited inventory and high prices. According to the most recent reading from the Federal Housing Finance Agency, house prices have risen for five straight months since the economy began to reopen, and house prices nationwide are roughly 10% higher than a year ago. November saw 841,000 new homes sold, which, although below estimates for the month, still represents elevated levels.
On top of the topsy-turvy economic data experienced during 2020, we of course also had an election season unlike any other. While the results of the Georgia run-off elections appears to have put Democrats in control of the Senate, the election of Joe Biden alongside what appears to be a divided Congress seemed to placate markets as certain, perhaps more market-unfriendly, outcomes were avoided. Toward the tail end of the quarter, Congress passed another stimulus package providing another round of coronavirus fiscal relief. It is expected that more stimulus measures would be brought forth early in a Biden administration, as well.
Looking forward, we are hopeful for a more uneventful 2021. Encouragingly, the Federal Reserve anticipates a rebound of GDP growth above 4% and unemployment dropping back to the 5% range by the end of 2021. A return to anything resembling a more normal outlook would be a welcome change.
Longer-term government bond yields have been trending higher recently as the bond market seems to be looking forward to better economic growth ahead. The drift higher in rates during the fourth quarter follows the sharp move lower at the onset of the pandemic, followed by a consolidation period during much of the third quarter. In all, the yield on the 10-year Treasury bond fell about 1 percentage point for the year, its largest drop since 2011.
The spread between the 2- and 10-year Treasury bond yields, often considered a predictor of economic growth prospects, remained positively sloped to finish the year. The 10-year bond closed 2020 at a yield of 0.91%, while the 2-year bond is more closely tied to the Federal Funds rate and remained near rock-bottom levels at a yield of 0.12%.
Corporate bond spreads, from investment-grade to high-yield, continued to narrow throughout the quarter, as the outlook for corporate profitability brightened and the Fed’s bond purchase programs are providing healthy levels of liquidity. As a result of spread narrowing, corporate bonds outperformed their government counterparts in the fourth quarter.
The Federal Reserve left rates unchanged at its most recent meeting, leaving its Federal Funds Target Rate at essentially zero. The committee has previously forecast that they do not anticipate raising interest rates through 2023. Further, the Fed noted that it stands ready to increase its overall easy money policies if it becomes clear that the economic recovery has stalled.
In comments following the Fed’s December meeting, Chairman Powell noted that due to significant disinflationary pressures around the world, it will likely take time to see inflation move up even with high levels of accommodative monetary policy. Even though signs of inflation may be a long way off, it’s important to note that the Federal Reserve recently implemented a new framework that may have substantial consequences for future inflation expectations. The framework effectively encourages the Fed to seek periods of higher inflation to compensate for past periods of below-target inflation, while also relaxing the Fed’s previous emphasis on raising interest rates simply because unemployment rates fall below a level estimated to put pressure on prices.
Treasury yields of selected maturities for recent time periods are displayed below (data from Bloomberg).
|Treasury Bill||Treasury Notes & Bonds|
|3 mo.||2 yr.||5 yr.||10 yr.||30 yr.|
Total return numbers for various fixed income indices over the past quarter and 12 months are below (data from Bloomberg).
|4th Quarter 2020 Returns|
Barclays Capital US Aggregate
|0.67%||BofAML US High Yield||6.48%|
|Barclays US Gov't Intermediate Index||-0.22%||BofA ML US Municipal Securities Index||2.02%|
|Dow Jones Corporate Bond Index||3.66%||J.P. Morgan EMBI Global Total Return||5.49%|
|12-Month Returns (as of 12/31/20)|
|Barclays Capital US Aggregate||7.51%||BofAML US High Yield||6.17%|
|Barclays US Gov't Intermediate Index||5.73%||BofA ML US Municipal Securities Index||5.26%|
|Dow Jones Corporate Bond Index||10.72%||J.P. Morgan EMBI Global Total Return||5.88%|
Positive vaccine news joined by massive monetary and fiscal stimulus packages helped 2020’s spectacular equity market rebound extend into the fourth quarter. The Dow Jones Industrial Average closed the year at an all-time high of 30,606, while the S&P 500 also closed at a record level, joining all major market averages moving higher to end a tumultuous 2020. In fact, during 2020, the Dow, S&P 500, and NASDAQ Composite combined to set more than 100 record closes, the most in any year since 2017. One sign of potential excess was seen in the IPO market, where a record $167 billion was raised on U.S. exchanges, easily beating the past record set in 1999. The end of the year bears little resemblance to the short-lived bear market earlier in the year.
For the final quarter of 2020, the S&P 500 finished more than 12% higher, as double-digit gains were broadly seen across equity indices. One notable change was seen with the relative outperformance of smaller capitalization stocks, where the Russell 2000 index gained more than 31% for the quarter, its best quarter on record. Another shift during the quarter was a glimmer of hope for value investors, as the S&P 500 Value Index had a quarterly return ahead of its Growth counterpart for the first time in 2020.
For the full year, the benchmark S&P 500 index gained more than 18%, an impressive return given the macro backdrop but dwarfed by the remarkable 45% gain of the tech-heavy NASDAQ Composite, which posted its best year since 2009. In the same vein, growth stocks beat value stocks by a record margin in 2020, a fourth straight year of outperformance. Small-cap stocks, which were negative for 2020 heading into the fourth quarter, ended the year up nearly 20% after their fourth-quarter rally.
On the international front, emerging market equities rose nearly 20% for the quarter and ended the year with a gain of 18.5%, just ahead of the S&P 500’s return. Strong performance reported from China’s economy has been a big reason for the outperformance in emerging markets. Developed markets also had a strong fourth quarter, as a satisfactory resolution to outstanding Brexit issues appears to have been attained. Developed markets gained more than 16% for the quarter but lagged their U.S. counterparts with only an 8% gain for 2020, as economic growth across Europe remains subdued.
Below is a table which displays various equity index returns for the past quarter (data from Bloomberg).
|Equity Indices||4th Quarter 2020|
|Dow Jones Industrial||10.73%|
|S&P 500 Growth||10.66%|
|S&P 500 Value||14.49%|
|Russell 2000 (small-cap)||31.36%|
|MSCI/EAFE (developed international)||16.09%|
|MSCI/EM (emerging markets)||19.61%|
On a sector basis, the fourth quarter saw a stark reversal of many of the trends that had dominated 2020. Cyclical-oriented sectors posted impressive rebounds, with the Energy sector leading the way by posting a nearly 28% gain for the quarter. Bear in mind that even after this impressive gain, Energy stocks are still the biggest laggards for 2020, falling more than 30% for the year even with the strong fourth quarter.
Keeping with the rotation into cyclicals and value-oriented stocks theme, the Financials, Industrials, and Basic Materials sectors all beat the market for the fourth quarter, as well. These sectors were among the hardest hit early in 2020 but are attracting more investor interest as the economy appears poised to rebound in 2021.
While all sectors finished the fourth quarter with positive returns, the more defensive areas of the market lagged for the quarter. Real Estate, Utilities, and Consumer Staples all posted more modest gains relative to the market for the quarter and for all of 2020.
Finally, Technology stocks were roughly in-line with the market for the quarter but finished the year with an impressive gain of nearly 44%, easily the best-performing sector of 2020. Consumer Discretionary (led by e-commerce) and Communication Services also outpaced the market for 2020, a year where the biggest technology-related companies carried the market higher.
The following table details S&P 500 sector total returns for the quarter (data from Bloomberg).
|Return by Stock Sector||4th Quarter 2020|
|4. Basic Materials||14.47%|
|5. Communication Services||13.82%|
|6. Information Technology||11.81%|
|7. Consumer Discretionary||8.04%|
|8. Health Care||8.03%|
|10. Consumer Staples||6.35%|
|11. Real Estate||4.94%|
The Investment Overview is published quarterly by the Union Investment Management Group of Union Bank & Trust Company. Please address correspondence to: Union Bank & Trust, Attn: UIMG, PO Box 82535, Lincoln, NE 68501-2535.