Global Market Commentary – Fourth Quarter 2020
Markets Reach New Highs in 4Q2020
Global equity markets pulled back in October, turned in some astonishing returns in November, performed admirably for the month of December and closed out the fourth quarter of 2020 with new record highs.
And while many are happy to see 2020 in the rear-view mirror, the performance for the last quarter and for all of 2020 for the major U.S. indices was nothing short of impressive, especially given the headwinds of COVID-19 and the drama surrounding the presidential election. For Q4 and the 2020 calendar year:
The DJIA added 10.2% in Q4 and rose 7.3% in 2020;
The S&P 500 added 11.7% in Q4 and rose 16.3% in 2020; and
NASDAQ added 15.7% in Q4 and rose 43.6% in 2020.
The themes that drove the markets in the fourth quarter were positive economic data, talk of another stimulus package and the first COVID vaccines being distributed around the world. Yes, there was plenty of election noise throughout the quarter, but in many respects, the markets seemed to ignore the political chatter.
For most of the quarter, Wall Street and Main Street did hold their collective breath until President Trump signed the $900 billion COVID-relief bill, which will provide much-needed relief to small businesses and direct payments to individuals and families.
And while there was hope that those payments might be increased to $2,000, those hopes were put on hold until at least 2021.
Volatility, as measured by the VIX, trended modestly lower from 26 to 23 for the quarter, although the end of October saw a significant spike that pushed the VIX north of 40.
West Texas Intermediate crude trended up for the quarter, adding about $10/barrel over the month to close out 2020 at $48.52/barrel.
Market Performance Around the World
Investors were thrilled with the quarterly performance around the world, as all 35 of the developed markets tracked by MSCI were positive for the last 3 months of the year. And of the 40 developing markets tracked by MSCI, all of them were positive for the last quarter too.
Index Returns4Q2020MSCI EAFE+15.75%MSCI EURO+17.05%MSCI FAR EAST+15.20%MSCI G7 INDEX+13.39%MSCI NORTH AMERICA+12.71%MSCI PACIFIC+16.47%MSCI PACIFIC EX-JAPAN+19.62%MSCI WORLD+13.63%MSCI WORLD EX-USA+15.52%
Source: MSCI. Past performance cannot guarantee future results
Sector Performance Rotated in Q4
The overall trend for sector performance for each of the four quarters in 2020 and each of the 12 months was good, but the performance leaders and laggards did rotate all year.
Q1 ended with every one of the 11 S&P 500 sectors turning in negative numbers;
Q2 ended with every one of the 11 sectors turning in positive numbers;
Q3 ended with 10 of the 11 positive; and
Q4 ended with all 11 sectors positive.
For the entire year, 4 of the 11 sectors ended in the red, with the Energy sector losing a staggering 37.31%.
Here are the sector returns for the shorter time periods:
Technology+11.52%+42.21%Energy+25.78%-37.31%Health Care+7.55%+11.43%Real Estate+4.09%-5.17%Consumer Staples+5.64%+7.63%Consumer Discretionary+7.86%+32.07%Industrials+15.19%+9.01%Financials+22.52%-4.10%Materials+13.92%+18.11%Communication Services+13.52%+22.18%Utilities+5.70%-2.83%
Reviewing the sector returns for just the fourth quarter and for all of 2020, we saw that:
All sectors were painted green for the fourth quarter;
The Financials sector had a wonderful quarter, helped by the Federal Reserve’s stance of keeping rates low through 2023, although it was not enough to push the sector into positive territory for the year;
While the Energy sector also turned in a terrific fourth quarter, it was nowhere near enough to override its annual loss of more than 37%;
The differences between the best performing and worst performing sectors in the fourth quarter was very wide, as the Energy sector’s return was about 6x greater than the Real Estate sector’s quarterly return; and
On an annual basis, the differences between the best and worst performing sectors is dramatic, as the Information Technology sector is up over 42% YTD and Energy is down a whopping 37%+.
How is This for Sector Rotation?
At the end of June, there were only 2 sectors with positive YTD performance – Information Technology and Consumer Discretionary;
At the end of July, there were 2 more – Health Care and Communication Services;
At the end of August, we added Consumer Staples and Materials to the positive YTD column;
September’s numbers were not negative enough to push any of those 6 sectors into the red YTD territory;
At the end of October, there were 7 sectors with negative YTD performance; and
At the end of November, there were 7 sectors with positive YTD performance; and
At the end of December, there were 7 sectors with positive YTD (annual) performance.
Those variations are the epitome of sector rotation. And the numbers empirically identify the importance of asset allocation and diversification for all investors.
Uncertainty was Rampant in 4Q2020
As the fourth quarter wrapped up, investors were thankful that the two dominating news events of 2020 also drew to a close, as the outcome of the presidential election and more certainty with respect to a COVID-19 vaccine came into focus.
Nevertheless, there was a lot of economic data that painted a conflicting picture and to many, the disconnect between the stock market and the current economy was disconcerting at times and difficult to reconcile.
Yes, the stock market looks forward and Wall Street will be quick to suggest that current valuations, lofty stock prices and new stock market records are justified, but Main Street is having a harder time digesting that theory. Especially since it appeared that for every positive economic data point, another negative one (if not two) was announced.
GDP Sets a New Record
Three days before Christmas, the U.S. Department of Commerce released the “third” estimate of real gross domestic product for the third quarter and the “third” estimate was revised upwards from 33.1% to 33.4%. This is of course on the heels of the 31.4% decrease in the second quarter.
According to the Bureau of Economic Analysis (within the Department of Commerce):
“The increase in real GDP reflected increases in PCE, private inventory investment, exports, nonresidential fixed investment, and residential fixed investment that were partly offset by decreases in federal government spending (reflecting fewer fees paid to administer the Paycheck Protection Program loans) and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.
The increase in PCE reflected increases in services (led by health care as well as food services and accommodations) and goods (led by clothing and footwear as well as motor vehicles and parts). The increase in private inventory investment primarily reflected an increase in retail trade (led by motor vehicle dealers). The increase in exports primarily reflected an increase in goods (led by automotive vehicles, engines, and parts as well as capital goods). The increase in nonresidential fixed investment primarily reflected an increase in equipment (led by transportation equipment). The increase in residential fixed investment primarily reflected an increase in brokers’ commissions and other ownership transfer costs.”
Consumer Confidence Slides
Every month, the Conference Board, in conjunction with Nielsen, compiles a survey of consumer attitudes on the economy in order to create its Consumer Confidence Index, which captures “consumers' perceptions of current business and employment conditions, as well as their expectations for six months hence regarding business conditions, employment, and income.”
From the release dated December 22n (which was also the same day as the new GDP numbers were released), it was reported that the Conference Board Consumer Confidence Index declined in December, after also decreasing in November.
The Index now stands at 88.6 (1985=100), down from 92.9 in November.
The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – decreased sharply from 105.9 to 90.3.
The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – increased from 84.3 in November to 87.5 this month.
“Consumers’ assessment of current conditions deteriorated sharply in December, as the resurgence of COVID-19 remains a drag on confidence,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “As a result, consumers’ vacation intentions, which had notably improved in October, have retreated. On the flip side, as consumers continue to hunker down at home, intentions to purchase appliances have risen.
Overall, it appears that growth has weakened further in Q4, and consumers do not foresee the economy gaining any significant momentum in early 2021.”
Inflation Appears in Check
The U.S. Department of Labor reported on December 10th that the Consumer Price Index for All Urban Consumers increased 0.2% in November.
From the BLS press release:
“Over the last 12 months, the all items index increased 1.2 percent before seasonal adjustment. The seasonally adjusted increase in the all items index was broad-based, with no component accounting for more than a quarter of the increase. The food index declined in November, as a decrease in the food at home index more than offset a small increase in the food away from home index. The index for energy rose in November, as increases in indexes for natural gas and electricity more than offset a decline in the index for gasoline.”
The following chart shows the 12-month change in CPI:
Existing-Home Sales Drop
On December 23rd (again, same day as GDP and CPI numbers released), the National Association of Realtors reported some not-so-rosy housing statistics:
“Existing-home sales fell in November, snapping a five-month streak of month-over-month gains, according to the National Association of Realtors®.
All major regions either took a step back or held steady in terms of their respective month-over-month status, but each of the four areas experienced significant year-over-year growth.”
The good news was that total sales were up almost 26% from a year ago and that the median sales price shot up over 14% in the past year.
Jobless Claims Still High
If there was anything consistent with respect to Jobless Claims for the final three months of the year, it was that weekly claims generally were either better or worse than consensus expectations.
And to underscore that point, on the final day of 2020, the Department of Labor reported that weekly jobless claims dropped by 19,000, which was positive as most had expected an increase. From the release:
In the week ending December 26, the advance figure for seasonally adjusted initial claims was 787,000, a decrease of 19,000 from the previous week's revised level.
The 4-week moving average was 836,750, an increase of 17,750 from the previous week's revised average.
The advance seasonally adjusted insured unemployment rate was 3.6 percent for the week ending December 19, unchanged from the previous week's unrevised rate.
Pending-Home Sales Fall
Then a week later on December 30th, the NAR reported that pending home sales declined in November, with month-over-month activity declining across the country.
The Pending Home Sales Index, a forward-looking indicator of home sales based on contract signings, fell 2.6% to 125.7 in November, the third straight month of decline.
Year-over-year, contract signings climbed 16.4%.
An index of 100 is equal to the level of contract activity in 2001.
The Energy Sector’s Wild Ride
The Energy sector has been on an erratic ride so far in 2020, as it:
Jumped more than 30% in the second quarter;
Lost almost 20% in the third quarter;
Leapt almost 26% in the fourth quarter; and
Is still down a staggering 37%+ for all of 2020.
Unfortunately, the medium- and longer-term performance is not pretty, despite November and December’s very positive numbers.
Take a look at the performance of the Energy sector for longer-time periods December 31, 2020: