Mike Horwath, CFA® Diversified’s Chief Investment Officer, provides a recap of 4Q 2020 and an overview of 2020 markets in general.
2020 Overall Market Recap
From a market perspective everything was pretty positive, despite the Covid pandemic. What drove the markets in 2020? What performed the best where the “stay at home” type stocks. Such as Information Technology, Online Retail Sales, and Healthcare. What struggled in 2020 were markets related to Energy, Travel, and Entertainment.
2020 featured a greater than 30% peak-to-trough drop in markets. Q2 GDP was down -31% annualized. April unemployment peaked at 14.7% having started the year at 3.6% and more recently sitting at 6.7%. Global stocks were up 70.5% from 3/23/2020 by year end 2020. Overall big tech firms held up the best while energy and financials lagged.
Why was GDP down so much and how did it recover?
Consumer spending really drives the economy. If consumers are not confident or employed then they tend not to spend. If consumers are not spending then the economy struggles and GDP drops.
In 3Q 2020 we saw consumer spending pick up. This was due in part to government stimulus and in part to employment picking back up as unemployment slowly started to drop.
Where do we stand going into 2021?
Many people are concerned about market valuation, the actual price of given stocks. Across the board, stocks are pretty expensive by any metric you choose to use, such as Price to Earnings, or Price to Book Value.
Economic Conditions heading into 2021:
- Higher stock valuations
- Very low interest rates
- Rising debt levels at both government and corporate levels
- Substantial fiscal and monetary stimulus
What is the 2021 Interest rate outlook?
Bond rates and interest rates are very low. They look to stay low for the near future. The US Federal Reserve has made it clear they are going to keep rates low, especially the short-end, for the next two to three years. Subject to overall economic concerns of course. The Federal Reserve has this policy to help control both unemployment and inflation.
What is the corporate and government debt outlook for 2021?
Both corporate and government debt levels increased in 2020. The government continues to increase debt through stimulus actions and Federal Reserve monetary policies such as buying bonds. Diversified does not see this as a short-term problem. However, we need to keep an eye on the potential longer-term impacts of debt to inflation and the value of the US Dollar.
A positive aspect of the Government stimulus is that it can help stocks maintain at their current levels.
What are our Market Expectations for 2021?
2021 Economic Expectations
- Continued economic recovery, probably slow 1H 2020. Dictated in part by the pace of COVID-19 vaccine distribution.
- Slow return to normal boosting the travel and entertainment sectors.
- Continued growth for stocks despite current expensive base.
- Both GDP and corporate earnings reviving in 2H 2021
- Interest rates and bond yields expected to remain very low
Emphasis that a major key to most of the above is broad scale COVID-19 vaccinations and a lowering of overall cases.
2021 Portfolio Positioning
- Still prefer risk assets over fixed income at this time.
- Beaten down sectors (energy/financials/materials) should get a boost, technology has staying power.
- Leaning toward both small cap and emerging markets stocks.
- Slightly reducing U.S. large cap due to its relative valuation.
- In fixed income, prefer corporate bonds over government and look to both high yield and emerging to add value.
How do we summarize 2020?
- 2020 was a very quick event driven recession. It was not a “bubble” rather the event was the global pandemic that impacted most economies around the world. Markets dropped historically fast and are recovering almost as fast.
- Government stimulus and monetary innervations helped to facilitate a recovery in both markets and economic conditions.
- It is very likely we should expect additional government stimulus and low interest rates in 2021.
- We expect in the second half of 2021 that economic data and conditions will catch up to the market recovery.
- Diversified is evaluating areas such as U.S. small cap stocks, emerging market stocks, and to corporate bonds as areas of opportunity in portfolios.