Amidst pockets of economic distress due to the global pandemic, the capital markets showed strong resilience during 2020. The strength in markets is mostly due to unprecedented fiscal and monetary stimulus programs of government spending and Fed interest rate easing and security buying programs. Talk of the “Fed Put”, a reference to the view that the markets will never irrevocably collapse since the Fed will always put a “floor” on how far it will let markets fall, certainly came to light during 2020.
During Q4 we began to see some strength in market sectors that previously lagged the broad market leaders as the gap between winners and losers began to narrow. As seen in the table below, the S&P 500 (IVV), led by large cap tech-oriented stocks, rose to record heights while producing a YTD return of 18.40%. Small caps (SCHA) finally recovered during Q4 with a strong 28.84% return after a dismal Q1 finishing with a YTD return of 19.35%. Diversifying positions in mid-cap, international, and emerging market equities all rallied strongly during Q4, but not enough to catch up to the YTD return of the S&P. US REITs (SCHH) and value-focused high dividend stocks (DVY) continued to struggle with negative YTD returns of -15.06% and -4.91%, respectively, but showed future promise with some recovery in Q4.
Fixed income returns were spotty during Q4 with core bonds delivering as much return as it could in the first part of the year; mathematically, with rates so low there is almost no potential return left in the U.S. Treasury market. Consequently, core bonds only delivered 0.52% during Q4; we should not expect much return in 2021 from these holdings. On the other hand, inv. grade corporates (LQD) and high yield bonds (HYG) still had something to offer the bond investor in the form of excess credit spread with Q4 returns of 3.11% and 5.44%, respectively.
2020 was a good reminder that there is no way to predict what future capital market returns will be, but there are good reasons to be optimistic about the future as I reported in my October 15, 2020 blog post recounting a Wellington Management report:
“In summary, the authors state that there are three main factors leading the way. First, even though there have been some bumps along the road, we are moving in the right direction regarding COVID-19. Treatments and vaccines are moving forward and there is reason to view this as a positive trend. Secondly, there has been strong fiscal and monetary support to bridge the economy over this crisis and more is hopefully coming. And thirdly, economies are opening slowly and there does not seem to be a prospect for another shutdown.”