Updated: Nov 9
The most tumultuous year in recent memory ended on a high note for markets as the fourth quarter brought political and medical clarity. This resulted in substantial market gains over the last three months, making 2020 a surprisingly strong year for returns. On November 9, less than a week after the election, Pfizer announced its COVID-19 vaccine was more than 90% effective at preventing infection, which was substantially better than initial estimates. A week later, Moderna announced its COVID-19 vaccine was 95% effective at preventing infection. This double dose of positive medical news provided hope for investors and fueled a rally that sent the S&P 500 to new all-time highs.
The consistently good news in November helped investors look past surging COVID numbers and nationwide lockdowns. But by mid-December, New York City school closures and new dining restrictions, along with a near state-wide “Safer at Home” order in California, began to weigh on economic activity and that became a headwind on stocks. Shortly thereafter, the FDA approved distribution of the Pfizer and Moderna vaccines, and the roll out of the vaccine reminded investors the end of the pandemic was hopefully only months away. As such, the surging number of coronavirus cases and widespread economic lockdowns did not cause a material decline in stocks. Finally, just before the end of the year, Congress approved a $900 billion stimulus bill to help support the economy as it continues to recover from the pandemic. That news helped the S&P 500 hit a new all-time high.
Markets ended the year on a high note, as federal economic support, record-breaking vaccine development, and an incredibly resilient corporate America offset the worst global pandemic in more than a century.
4th-Quarter and Full-Year 2020 Performance Review
All major U.S. stock indices were solidly higher in the fourth quarter, led again by the tech-heavy Nasdaq, which mildly outperformed on still-lingering concerns about near-term economic growth following the surge in COVID cases into year-end. But the Nasdaq outperformance was minor relative to earlier in the year, and the S&P 500 and Dow Jones Industrial Average also posted positive quarterly returns. But on a full-year basis, the Nasdaq handily outperformed the other two large-cap indices in 2020 as investors sought the secular growth potential of the tech sector amidst macroeconomic uncertainty.
By market capitalization, small caps substantially outperformed large caps in the fourth quarter, and those late year gains helped small caps slightly outperform large caps in 2020. In the first three quarters of 2020, large-cap stocks outperformed small caps due to investor concerns about future economic growth during and after the pandemic, as large caps are historically less sensitive to an economic slowdown than small-cap stocks. However, that out-performance reversed during the last three months of the year on vaccine optimism, more stimulus from Congress, and a reiteration of accommodative monetary policy from the Fed for years to come.
From the standpoint of investment style, value outperformed growth for the first time in 2020 during the fourth quarter. The outperformance by value stocks underscored investor optimism for an economic rebound in 2021, courtesy of multiple COVID vaccines and more economic stimulus. For the full year, however, growth massively outperformed value due to strength in the tech sector.
1st Quarter and 2021 Market Outlook
As we turn attention to 2021, first we acknowledge the hardship so many have endured over the past year, be it physical, emotional, or financial, and we sincerely hope that those burdens are eased in 2021 and beyond. But as we begin a new investing year, we are pleased to say that, from the macroeconomic outlook for 2021 is materially more positive than the majority of 2020.
First, the Fed is continuing its historic QE program and will keep rates low for years to come. That should continue to support asset markets broadly. Meanwhile, Congress finally agreed on another historically large fiscal stimulus bill which will help the economy weather the ongoing pandemic and related economic lockdowns. Politically, neither party has a material majority in either house of Congress and as such, markets are not concerned about policy risks to the economy (substantial tax increases, excessive regulation, or major initiatives like healthcare reform). Finally, corporate America demonstrated itself both resourceful and resilient, and while some industries (airlines, cruise lines, hotels) face a long recovery, many American companies ended 2020 in strong financial shape. As shocking as it sounds, the fundamental outlook for stocks is positive. Still, 2020 clearly demonstrated that nothing is guaranteed, and we must expect the unexpected. To that point, unemployment remains historically high (still well above levels we saw at the depths of the Great Recession) and while many of those unemployed workers should return to work once the pandemic recedes, it is unclear how many small businesses will survive to hire them back.
As the economy normalizes, appetite for government stimulus will likely diminish, and it is unclear how quickly economic growth returns to pre-COVID levels. Regarding stimulus, investors need to remain wary of negative consequences of the ballooning federal debt and budget deficits. We continue to monitor inflation and interest rates as sensitive instruments to increased deficits and Federal debt. Finally, stock valuations are at multi-year highs. None of these risks, by themselves, offset positive factors helping the economy and markets so the macroeconomic outlook for 2021 is positive. But we will certainly monitor risks.
As we consider all that 2020 held and begin look forward, the biggest takeaways from this historic year in the markets is that well-planned, long-term-focused, diversified planning can withstand virtually any market surprise and a related bout of volatility, including the worst pandemic in 100 years.
At Brixton Capital Wealth Advisors, we understand the risks facing both the markets and the economy, and we are committed to helping you navigate this still-challenging investment environment. Successful investing is a marathon, not a sprint, and even intense volatility like we experienced in 2020 is unlikely to alter a diversified approach set up to meet your long-term investment goals.
Therefore, it’s critical to stay invested, remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.
To schedule a portfolio review, or if you simply have a question or comment, Please do not hesitate to contact us. Thank you for your ongoing confidence and trust.