By Tom Burnett CFA
Investors experienced extremely volatile market movements in 2020. Off to a good start, the stock market rallied into February until fears of a global Covid-19 outbreak brought advances to a halt. The March-April sell off was brutal and immediate as investors rightly feared that the infection would rapidly spread to all segments of the economy. As governments responded, economic activity ground to a halt. Over 26 million working Americans became unemployed and second quarter GDP dropped at an annual rate of more than 30%. Then in April and May, the stock market launched a major rally into the end of the year. From that bottom, the major indexes rallied well over 50% and during the final week of the year, all three major indexes (Dow, S/P 500, Nasdaq Composite) traded at record, historic highs. For the year, the S/P 500 Index returned over 16%, including dividends. Small cap stocks continued to underperform large caps as the S/P Small Cap 600 returned just 8%, half the rate achieved by the S/P 500. In fact, over the past ten years, the 500 Index has outperformed the 600 Index by an average of more than 2% per year.
Globally, stock markets in non-US markets underperformed the US market. In China, the primary Shanghai Index rose 10% while socks in Europe struggled to overcome the uncertainty of the UK Brexit-EU conflict. The FTSE 100 Index of UK stocks fell by more than 12% in 2020.
Fixed income investors benefited from a generous Federal Reserve posture which sought aggressively to add liquidity to the financial markets. The 20-year Treasury Bond provided a return of more than 16%, including price appreciation, for the year. Commodities presented a mixed picture. Silver rose 46% and gold returned 23%, but crude oil was down 21%.
On balance, the US equity markets showed great resilience in 2020, managing to overcome the uncertainty of a Presidential election and the damage inflicted by the Covid virus. Complacency, however, should be avoided. There are signs of overheating which suggest a correction is long overdue. For example, the IPO and SPAC (blank checks) markets are trading at high valuations which are not sustainable. The Bitcoin market is showing signs of overheating as the digital currency’s price has tripled this year and has risen more than six times its price during the March sell off. In addition, the S/P 500 earnings multiple of consensus
2021 estimates have risen past 22x, historically an extremely high level.
No one can accurately predict what 2021 will bring, but it will likely be less exciting and volatile compared to what transpired in 2020.
(All performance and return data are sourced to the December 30, 2020 Wall Street Journal).
Tom Burnett CFA is Director of Research