Fourth Quarter Market Review

From start to finish, the turbulent year of 2020 was not what anyone expected, and we’re glad it’s now in the history books. Financial markets faced the worst global pandemic in over 100 years, a year which saw many businesses close. Numerous companies threw out their playbook and were forced to adapt to an environment of reduced hours of operation or remote work environments. People scrambled to find face masks, hand sanitizer, and toilet paper. On the economic front, Gross Domestic Product (GDP) saw the sharpest quarterly decline on record while unemployment figures spiked to levels not seen since the Great Depression. Despite being forced to adapt to our new normal, by year-end, global equities rose over 16% while the S&P 500 continued the impressive run from 2019, increasing over 18% for the year. Many asset classes ended positive for the year, despite the sharp sell-off in March and April. The S&P 500 was up a staggering 70% off its March lows, while small capitalization U.S. stocks were up 99% off the lows. Impressive to say the least.

As for the fourth quarter, a strong December followed an exceptional November, with all major equity indexes increasing double digits. The Dow Jones Index had an enormous monthly gain in November, up over 12%, a figure not seen since 1987. The S&P 500 reached new all-time highs led by the technology, consumer discretionary, and telecom sectors, while more cyclical parts of the market like energy, real estate investment trusts, financials, and utilities lagged. There continues to be discussion on Wall Street surrounding several “narratives for stocks” including: the general “bullish narrative” consisting of additional fiscal and monetary stimulus (additional liquidity) which may provide a tailwind for equity markets; and the “re-opening narrative” – dependent upon the successful deployment of the COVID vaccine – which would unleash pent-up demand for goods and services, ostensibly causing earnings growth to accelerate and stock prices to follow. Based on some of the euphoria surrounding asset prices in certain parts of the market, we’d say a heavy dose of “fear of missing out” is also at play.

As of the first week of January, the 10-year Treasury yield pushed above 1% for the first time since March. The Barclays Aggregate increased 7.5% for the year, its second consecutive year of returns that looked more stock-like than traditional fixed income returns. The “reflation narrative” has begun to pickup steam, with the intermediate part of the yield curve steepening and inflation picking up modestly. The unprecedented level of federal balance

sheet expansion has put pressure on the dollar, which has declined to levels not seen since 2018 relative to other major currencies. The weaker dollar has provided a nice boost to international investments as of this writing.  Given the move in the dollar and pickup in inflation, this quarter saw real assets and commodities increase.  Gold finished the year up over 24%, while oil increased drastically off its April lows but closed down over 20% for the year.

We usually end our market commentary with a reminder that building globally diversified portfolios is at the heart of our investment philosophy. The year 2020 provided a stark reminder of why we work towards this endeavor.  In the book Rome Wasn’t Burned In A Day, humorist and professor Leo Rosten states, “Some things are so unexpected that no one is prepared for them.” While very few might have expected the coronavirus and its subsequent effects on global financial markets, staying the course and owning a globally diversified portfolio is proof that you don’t have to know what is coming to be prepared.

If one had a crystal ball and knew the pandemic was coming in January 2020, would an investor have decided to push their chips in? A year where we faced a global pandemic, civil unrest, election fatigue, and general uncertainty makes staying emotionally invested in the market difficult, and market timing almost impossible. This year was exceptionally difficult to be an investor, yet ultimately rewarding.

It’s always helpful to be reminded how markets have faced world wars, recessions, debt crises, bailouts, bubbles, and yes, pandemics. Since 1950, the S&P 500 has been positive 54% of all trading days (17,866 days), 60% of all months (852 months), 67% of all quarters and 73% of all years, evidence that time in the market is more important than timing the market to reach your goals. More striking, MFS Investment Management recently published a statistic that the return over the past 30 years on the S&P 500 was 10.7% per year, however just missing the 24 best percentage gain days over this time period (24 days in total, not 24 days per year), cut your return in half, to just 5.3%.

So this brings us to 2021. At Madison, we understand the folly of forecasting, but feel markets could be supported by an accommodative Federal Reserve and additional fiscal stimulus as we navigate through the COVID pandemic.  There are clearly long-term risks given the measures taken to support the economy, but the rollout of multiple vaccines, high personal savings, pent-up demand, and improving economic data could provide a backdrop where stocks outperform bonds. We think the latter half of 2021 could set up to surprise investors as the economy opens and life starts to return to some semblance of normal. This, of course, is predicated on a successful vaccine roll-out and no further surprises from the virus.

While 2020 proved to be chock-full of challenges and hurdles, we look towards brighter days and an eventual return to some normalcy.  In the meantime, we look forward to seeing many clients and friends in person this year and wish everyone a happy and healthy 2021!

Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Madison Wealth Management does not provide tax, legal or accounting advice. © 2021 Madison Wealth Management