Fourth Quarter Market Summary
After a slow start in October, stocks posted strong results for the fourth quarter to end an excellent year for equites around the globe. The surge appears to have been fueled by fiscal and monetary stimulus, as well as, the arrival of a COVID-19 vaccine.
US Stocks, measured by the S&P 500 Index, were up 12.2% for the quarter, bringing its gain to 18.4% for the year. For the first time in a while, value stocks outperformed growth for the quarter. The Russell 1000 Value Index was up 16.3%, while the Russell 1000 Growth Index was up 11.4%.
International stocks also performed well, the MSCI ACWI ex US index was up 17.0% for the quarter, outpacing the US by nearly 5%. International emerging market equities outperformed the developed markets in the fourth quarter. Investors will continue to watch to see if international stocks can continue the momentum.
Treasury yields rose during the quarter. The 10-year Treasury yield ended the quarter at 0.92% after starting the quarter at 0.68%. Corporate bonds outperformed Treasury bonds as risk outperformed safety. High yield bonds were up 6.5% for the quarter.
Below is a table highlighting various market index returns over the past 3, 12, and 36 months:
Source: Morningstar.com – S&P 500 performance 1/1/2020 – 12/31/2020
After hitting all-time highs in February, the COVID-19 pandemic weighed on stocks as the S&P 500 Index collapsed to its lowest level on March 23rd and set a record for the fastest bear market. Stocks then surged in April, with the S&P 500 Index posting a 12% gain. What changed? The rapid recovery in the market seemed disconnected from what people were experiencing in the economy.
As seen in the chart above, bad news continued to pour in as the market continued to recover. Crude oil traded negative, real GDP fell by 4.8%, and America’s largest social movement was started with the death of George Floyd. During all of this, the market continued to climb. Stocks moved higher as the US was hit with a second and third wave of the virus. Next, we were faced with the divisive presidential election. With the two sides so divided, many investors were worried about the impact of the election results on the market. As November 3rd came and went, the market continued to march forward.
There were some reasons for the market moving higher. The CARES Act in March and the COVID-Related Tax Relief Act of 2020 were the economic stimulus packages that the economy desperately needed. Liquidity in the form of direct payments to individuals and the Paycheck Protection Program for businesses were much needed programs. Even with all of this infusion, many people and businesses around the US are still struggling.
As discussed previously, markets have a long-term view and often react to forward looking projections. This is a reason why the market has recovered from the March lows even as economic conditions did not improve at nearly the same rate. Stock prices are future-oriented and while short-term price movements are sometimes driven by fear, prices often adjust back to future outlooks.
If you ever needed to prove how difficult it is to predict how markets will react to news, 2020 was the perfect case study. Even in the face of an economic decline, a global pandemic, and fears over the election outcome, the S&P 500 Index posted a gain 18.4%. Nobody, if told in January what would unfold in 2020, would have predicted that type of market performance for the year.
Investors who tried to predict how the market would react to a second or third spike in coronavirus cases or the election outcome could have easily exited the market to go into cash and miss out on the market recovery. Analysts predicted that if Democrats won the election, the market would react negatively and there would be an immediate decline.
The events in 2020 affirm what we all know. Investors must maintain a long-term outlook and should not let fears drive their investment decisions. We should not attempt to predict future events, because such predictions are far too uncertain.
Emotion is a powerful force. We cannot let emotions drive our investment decisions. Investors need to stay focused on the outcomes they are trying to achieve and decisions should be based off of maximizing the probability of achieving that outcome. Rebalancing around a target allocation, buying when stocks are down, and selling stocks when they are at highs oftentimes helps achieve an investor’s goals. It’s easy to say in theory, but much more difficult to do in practice.
That’s exactly what happened for many of our clients in 2020. We were buying stocks in March and April. Some of those buys declined shortly after purchase, but our target allocations assured us that it was the right thing to do. We were selling stocks for many clients late in the year as the market recovered and account balances were near all-time highs.
We did not make these buys and sells because we have a crystal ball to predict the future, our allocations to risk assets drove the decision, not emotion. Doing this will improve our investment decision making and likely have a positive impact on our outcomes.
Stay focused on the long term and enjoy the rest of winter.
JR Geld, CFA, CFP®
Philip E. Huber, Jr, CPA, CFP®
HWA Financial Group
3448 Ellicott Center Dr.
Ellicott City, MD 21043