Wall Street’s Stock Market Projections Missed the Mark Last Year
If Wall Street stock market return projections from a year ago were darts, they all missed the board. Certainly, this time last year, no one was expecting to face an economic brick wall created by the exogenous shock of business shutdowns in a global pandemic. Even the savviest prognosticator would not have considered that trillions of dollars of economic stimulus would come into play, providing a powerful safety net to risk assets. But when all was said and done, those two factors drove financial markets; first straight into the wall, then after a short pit stop back to racing down the track again at top speed.
Even the most seasoned investors found themselves in unchartered territory in one of the most rapid and volatile bear markets in history. It also turned out to be the shortest on record. It took only 32 days for the market to fall by 34% from the peak in February to the trough in March. And just as quickly as it started, a monumental V‑shaped recovery took hold and buoyed the S&P 500 by over 50% to new highs in August and 70% by year end. Investors recalling the long hibernation the bear market took in 2000 (over 30 months) were understandably not expecting the swift rebound. Once the recovery took hold, investors rarely paused to look back. The technology‑focused Nasdaq Composite Index had 55 new record closes in 2020 on its way to a remarkable 45% return. Small cap stocks (Russell 2000) more than doubled to new record highs from the lows reached in March. At year end, the broad‑based S&P 500 Index managed to provide patient investors with a greater than 18% return.
|Market Index Returns||Dec 2020||2020 Year|
|S&P 500 Index||3.8%||18.4%|
|Russell 2000 Index||8.7%||20.0%|
|MSCI EAFE Index||4.7%||7.8%|
|Barclays US Agg. Bond Index||0.1%||7.5%|
|FTSE 3 Mo. T‑Bill Index||0.0%||0.6%|
Stock Market Review & Outlook
Stay‑at‑Home Investors Fear of Missing Out Fueled Market Momentum
Stock market returns were driven by investors continued appetite for technology‑related companies. Information Technology returns were the standout winner for the calendar year, followed by Consumer Discretionary. Despite a recovery in the final month, Energy stocks finished the year deep in the red and Financials were modestly negative. Except for a handful of trading days, growth stocks continued to dominate value. The Russell 1000 Growth Index outperformed Russell 1000 Value by the widest margin in history. The initial public offering (IPO) market was red hot in the fourth quarter, raising an astounding $67 billion for new public companies. Stay‑at‑home investors’ demand for the newest stocks drove the IPO market to a new record in 2020 ($167 billion), an unthinkable outcome during the risk‑off stance taken by investors earlier in the year.
In a year when the Federal Open Market Committee cut short‑term interest rates to zero and the bellwether 10‑Year U.S. Treasury closed with a paltry yield of 0.92%, investors favored higher dividends earned by holding stocks, despite the increased level of risk.
|S&P 500 Sector Returns||Dec 2020||2020 Year|
Economic Review & Outlook
Filling in the Economic Hole Created by the Global Pandemic Continues
Third quarter Gross Domestic Product (GDP), the key measure of economic growth in the U.S., was revised upward to 33.4%, a marked improvement from the two consecutive negative quarters (indicative of recession) recorded earlier in the year. With average fourth quarter estimates of 4‑5%, calendar year 2020 is likely to generate a modestly negative rate of growth for the full year. Economists are calling for a stronger 2021, with above trend growth forecasts averaging 4%. A further reduction in Unemployment levels will be critical to a continued economic turnaround. Personal Consumption, the largest component of GDP, cannot be sustained by stimulus and government support alone.
Chart of the Month
The S&P 500 Calendar Year 2020 Bungee Jump
The chart above of the S&P 500 price change in 2020 feels like the most appropriate way to sum up the year. The rapid descent and dramatic recovery of the market, more typical of a multi‑year event, are likely to hold a prevalent place in financial markets history for some time to come. The negative total return of the index from the start of the year through March 23rd (-30.4%) was dwarfed by the 70.2% total return from this turning point through year end.
Looking Ahead in the New Year
There is much we are all looking forward to leaving behind from a challenging 2020 calendar year. The lessons learned over many years, and implemented in the tumultuous year just ended, will continue to guide us in the new year. Staying invested through short‑term strains in financial markets to achieve long‑term goals is key among them. Staying invested of course does not mean sitting on hands with fingers crossed. Repositioning portfolios to enhance risk‑reward positioning based on changing environments and capitalizing on opportunities in which intrinsic value disconnects from current value, which served us well last year, will be our guiding roadmap in the coming year. Like most, we will be closely watching the roll out of the vaccine, transition in Washington, and other key factors likely to impact businesses and the economy.
Seeking income on behalf our clients outside of traditional bond investments will be another key order of business. We are not alone in our assessment that preferred stocks, real estate investment trusts and dividend paying stocks are viable alternatives to traditional fixed‑income investing. Our in‑house research team will be doing the deep dive analysis necessary to make prudent investments in these areas on behalf of our clients. A key factor in successful investment analysis will continue to require putting aside the “noise” of information overload we all face and focusing on the core fundamentals of value.
Please reach out to one of your Account Officers or any member of our Executive Leadership Team to discuss topics raised in this letter or anything else we can be helpful with.