28 Jan Bridge Perspective – Market Review 2020
These newsletters have contained their fair share of adjectives to describe the past twelve months and for good reason. 2020 was truly remarkable – from escalating geopolitical tension to start the year (i.e. US and Iran) to a global pandemic to heightened racial tensions to one of the most contentious US presidential elections in a generation there was no shortage of potentially world changing events. And those were just the SOME of the major headlines. Yet every major asset class except real estate had a strong year! This is a time of year for reflection and we will start this letter with doing just that.
Market Review 2020
The year 2020 proved to be one of the most tumultuous in modern history, marked by a number of developments that were historically unprecedented. But the year also demonstrated the resilience of people, institutions, and financial markets.
The novel coronavirus was already in the news early in the year, and concerns grew as more countries began reporting their first cases of COVID-19. Infections multiplied around the world through February, and by early March, when the outbreak was labeled a pandemic, it was clear that the crisis would affect nearly every area of our lives. The spring would see a spike in cases and a global economic contraction as people stayed closer to home, and another surge of infections would come during the summer. Governments and central banks worked to cushion the blow, providing financial support for individuals and businesses and adjusting lending rates.
On top of the health crisis, there was widespread civil unrest over the summer in the US tied to policing and racial justice. In August, Americans increasingly focused on the US presidential race in this unusual year. Politicians, supporters, and voting officials wrestled with the challenges of a campaign that at times was conducted virtually and with an election in the fall that would include a heightened level of mail-in and early voting. In the end, the results of the election would be disputed well into December. As autumn turned to winter, 2020 would end with both troubling and hopeful news: yet another spike in COVID-19 cases, along with the first deliveries of vaccines in the US and elsewhere.
For investors, the year was characterized by sharp swings for stocks. March saw the S&P 500 Index’s decline reach 33.79% from the previous high as the pandemic worsened. This was followed by a rally in April, and stocks reached their previous highs by August. Ultimately, despite a sequence of epic events and continued concerns over the pandemic, global stock market returns in 2020 were above their historical norm. The US market finished the year in record territory and with an 18.40% annual return for the S&P 500 Index. Non-US developed markets, as measured by the MSCI World ex USA Index, returned 7.59%. Emerging markets, as measured by the MSCI Emerging Markets Index, returned 18.31% for the year.
Fixed income markets mirrored the extremity of equity behavior, with nearly unprecedented dispersion in returns during the first half of 2020. For example, in the first quarter, US corporate bonds underperformed US Treasuries by more than 11%, the most negative quarterly return difference in data going back a half century. But they soon swapped places: the second quarter was the second-most positive one on record for corporates over Treasuries, with a 7.74% advantage. Large return deviations were also observed between US and non-US fixed income as well as between inflation-protected and nominal bonds.
Global yield curves finished the year generally lower than at the start. US Treasury yields, for example, fell across the board, with drops of more than 1% on the short and intermediate portions of the curve. The US Treasury curve ended relatively flat in the short-term segment but upwardly sloped from the intermediate- to long-term segment. For 2020, the Bloomberg Barclays Global Aggregate Bond Index returned 5.58%.
Uncertainty remains about the pandemic and the broad impact of the new vaccines, continued lockdowns, and social distancing. But the events of 2020 provided investors with many lessons, affirming that following a disciplined and broadly diversified investment approach is a reliable way to pursue long-term investment goals.
Markets Look to the Future
The fluctuating markets in the spring and summer were also a lesson in how markets incorporate new information and changes in expectations. From its peak on February 19, 2020, the S&P 500 Index fell 33.79% in less than five weeks as the news headlines suggested more extreme outcomes from the pandemic. But the recovery would be swift as well. Market participants were watching for news that would provide insights into the pandemic and the economy, such as daily infection and mortality rates, effective therapeutic treatments, and the potential for vaccine development. As more information became available, the S&P 500 Index jumped 17.57% from its March 23 low in just three trading sessions, one of the fastest snapbacks on record.
One major theme of the year was the perceived disconnect between markets and the economy. How could the equity markets recover and reach new highs when the economic news remained so bleak? The market’s behavior suggests investors were looking past the short-term impact of the pandemic to assess the expected rebound of business activity and an eventual return to more-normal conditions. Seen through that lens, the rebound in share prices reflected a market that is always looking ahead, incorporating both current news and expectations of the future into stock prices.
Owning the Winners and Losers
The 2020 economy and market also underscored the importance of staying broadly diversified across companies and industries. The downturn in stocks impacted some segments of the market more than others in ways that were consistent with the impact of the COVID-19 pandemic on certain types of businesses or industries. For example, airline, hospitality, and retail industries tended to suffer disproportionately with people around the world staying at home, whereas companies in communications online shopping, and technology emerged as relative winners during the crisis. However, predicting at the beginning of 2020 exactly how this might play out would likely have proved challenging.
In the end, the economic turmoil inflicted great hardship on some firms while creating economic and social conditions that provided growth opportunities for other companies. In any market, there will be winners and losers—and investors have historically been well served by owning a broad range of companies rather than trying to pick winners and losers.
Sticking with Your Plan
Many news reports rightly emphasized the unprecedented nature of the health crisis, the emergency financial actions, and other extraordinary events during 2020. The year saw many “firsts”—and subsequent years will doubtless usher in many more. Yet 2020’s outcomes remind us that a consistent investment approach is a reliable path regardless of the market events we encounter. Investors who made moves by reacting to the moment may have missed opportunities. In March, spooked investors fled the stock and bond markets, as money-market funds experienced net flows for the month totaling $684 billion. Then, over the six-month period from April 1 to September 30, global equities and fixed income returned 29.54% and 3.16%, respectively. A move to cash in March may have been a costly decision for anxious investors.
A Welcome Turn of the Calendar
Moving into 2021, many questions remain about the pandemic, new vaccines, business activity, changes in how people work and socialize, and the direction of global markets. Yet 2020’s economic and market tumult demonstrated that markets continue to function and that people can adapt to difficult circumstances. The year’s positive equity and fixed income returns remind that, with a solid investment approach and a commitment to staying the course, investors can focus on building long-term wealth, even in challenging times.
Market Update – A Brief Around the World Tour of Markets
The broad trends highlighted above were witnessed throughout global stock markets. Real estate both within the US and abroad was the only major asset class with negative performance for the year with US Real Estate Investment Trusts (REITs) losing -11.20% and non-US REITs losing -10.09%. There was a noticeable shift from the first half of the year to the second half. The US market had the fastest drawdown and subsequent snapback in the first and second quarter, respectively, largely due to technology influenced growth stocks while the third and fourth quarter saw a rotation into small stocks and more cyclical value oriented stocks. International markets, both developed and emerging, also played catch up in the second half, especially in the fourth quarter (Q4).
Emerging markets topped the return charts in Q4, earning their entire calendar year return in those 3 months alone. US and international developed stocks largely marched in unison in Q4 though US markets were certainly the better market for 2020 as a whole. However, the best performing individual country was Denmark, which jumped 42.95% for the year. Emerging Asian markets outperformed other emerging countries likely due to their successful control of the pandemic throughout the year. US technology stocks experienced extreme outperformance in the first half of the year and while their momentum slowed in the fourth quarter they still turned in a banner year.
Interest rates dropped throughout 2020 and did remain at low levels to end the year however, they were trending upward as the year ended. The decline in rates for the year was rather extreme due to the extraordinary circumstances presented by the pandemic and the resulting central bank action – the interest rate/yield on 1-month Treasury Bill dropped 1.40% to 0.13% while the interest rate/yield on the 10-year Treasury note dropped 0.98% to 0.93%. As a result of the fall in rates, longer term bonds performed exceptionally well – the Bloomberg Barclays US Government Bond Index Long rose 17.55%. Inflation protected securities were also in the top of the bond market class earning 10.99% as investors repositioned for an anticipated increase in inflation.
|Period Returns (%)*
On the Economy
The global economy faced plenty of adversity this past year. The pandemic related shutdowns have all but crippled certain industries – travel, hospitality and real estate were some of the hardest hit areas. The employment market experienced some of the most extreme headwinds on record. Policymakers responded in unprecedented fashion and data through early Q4 seemed to show that their response along with the slow reopening of the economy had worked to stave of the worst case economic scenarios. However, as a second-wave of COVID cases spread throughout much of the world in the fourth quarter some of the ground gained was lost. Another stimulus package was passed in response to the worsening economic data. A new president is in the Oval Office and he has already proposed another massive stimulus package totaling $1.9 trillion. If such a package is passed there will certainly be long-term implications from the debt required to fund it but it may be what the economy needs to get us to the light at the end of the pandemic tunnel.
|*Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the ICE BofA US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofA US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2021 FTSE Fixed Income LLC, all rights reserved. ICE BofA index data © 2021 ICE Data Indices, LLC. S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
 Adapted from “Market Review 2020” from Dimensional Fund Advisors LP.
 S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment.
 MSCI data © MSCI 2021, all rights reserved. Indices are not available for direct investment.
 US corporate bonds represented by the Bloomberg Barclays US Credit Bond Index. US Treasuries represented by the Bloomberg Barclays US Treasury Bond Index. Bloomberg Barclays data provided by Bloomberg. Indices are not available for direct investment.
 ICE BofA government yield. ICE BofA index data © 2021 ICE Data Indices, LLC.
 Bloomberg Barclays data provided by Bloomberg. All rights reserved. Indices are not available for direct investment.