Fourth Quarter 2020 Review & Outlook

"We've had 10 years worth of change in 10 months." - Rajeev Misra, CEO of the Softbank Vision Fund

Review

What a roller coaster 2020 was financially and emotionally! It has become a cliché during the pandemic that we have undergone 10 years of change in a matter of months. Any activity that could be performed online was transitioned into the virtual environment during 2020. Whether it was working from home, virtual learning, telehealth appointments, grocery delivery, or online fitness classes, anything that had traditionally been handled or performed in person was digitized. Virtual meetings and ecommerce are now the norm.

Twenty years ago, there were approximately 248 million users on the internet worldwide. Now there are more than that in the United States alone, and almost 5 billion worldwide. Over half of the world's population is now connected to the internet via the smartphone in their pocket. Everything now seems to happen faster, and that included the dramatic fluctuations in the stock market during 2020. We basically experienced the economy and stock market enduring a multi-year cycle in just a few months.

The market's downturn in February and March, and subsequent rebound happened at an alarming pace. Sam Stovall, the Chief Investment Strategist at CFRA summed it up well: "Everything was so fast. We went from peak to trough in 33 calendar days, which was three times as fast as the 1987 bear market. It fell 34% in 33 calendar days. The Fed said we're going to do whatever it takes, the market said you don't fight the Fed and we got to breakeven on August 18th, which made it the fastest recovery on record."

For the full year, the total return of the S&P 500 was 18.4%, including dividends. The Dow Jones Industrial Average (DJIA) struggled to keep pace for the year but was still up 9.7%. However, both indices were outdone by the technology heavy NASDAQ Composite, posting a staggering 44.9% return, its best year since 2009. Not surprisingly, the top performing sectors of the market during 2020 were technology, consumer discretionary, and communications services. The weakest sectors were energy, REITs, financials, and utilities. In foreign markets, developed international stocks advanced 8.3% while emerging markets were up 18.7%.

The DJIA crossed the 30,000-point threshold on November 24, 2020. Each 10,000-point incremental gain in the Dow typically comes with some media buildup and fanfare. To put the Index's gains into historical context, the DJIA crossed the 10,000 level for the first time on March 29, 1999, and the 20,000 level nearly eighteen years later on January 25, 2017. During the coronavirus downturn, the Dow dropped to a low of 18,591 on March 23rd before it began its march towards 30,000 in November, less than four years removed from achieving the 20,000 level. As large as these point increases seem at first glance, it is not reckless to assume a doubling of a market index like the Dow over an eight-to-ten-year period. If that holds true, maybe the 40,000 level can be achieved in the next five years.

The stock market performance in recent years has become heavily dependent on the large technology stocks. Remarkably, 53% of the total return for the S&P 500 in 2020 was due to the performance of Apple, Amazon, and Microsoft. The returns for notable companies such as Apple (up 80%), Microsoft (up 41%), Alphabet (up 30%), Amazon (up 76%), and Facebook (up 33%) were due in large part to the digital trends we noted earlier.

Outlook

The most important development for the economy and stock market in 2021 will likely be how quickly the vaccine is distributed in the US and globally. There are currently two available vaccines, one from Moderna and one from Pfizer. A vaccine from Johnson & Johnson should be available soon, with additional vaccines hopefully coming from AstraZeneca and Novavax. Assuming effective distribution of vaccines, individuals could be able to return to more normal activities come the spring and summer.

The ongoing fiscal response from the federal government will be important to bridging the gap until most of the population has been vaccinated. The fiscal response we witnessed in 2020 was unprecedented. The $900 billion fiscal package in December brings the total spending since February to approximately $3.5 trillion. That is more as a share of gross domestic product than the total response to the 2007-2009 recession. The results of the Georgia Senate runoff elections have transferred control of the Senate to the Democratic Party, which will give the Democrats control of the White House and Congress. The popular opinion is this should lead to further increased government spending. Congress will soon be negotiating another relief bill of probably $2 trillion or more, aimed at larger checks to individuals, support for small businesses, funding for state and local governments, spending on vaccines, and possibly even long-awaited infrastructure spending.

In addition to relief provided by Congress, the Federal Reserve continues to be extremely accommodative as well. At the recent Federal Reserve meeting in December the Fed stated that interest rates, which are basically close to zero, will stay at these levels until and unless inflation reaches 2% and unemployment drops to pre-pandemic levels.

We see many "green shoots" that show promising possibilities for the economy and stock market in the year ahead:

  • Business startups are robust. During the third quarter of 2020, nearly 1.6 million new business applications were submitted.
  • According to the Federal Reserve, there has been $2 trillion accumulated in savings accounts since February 2020. This cash, representing more than 10% of US gross domestic product, is likely waiting to be spent or invested.
  • Due to the aggressive response from the Federal Reserve, the financial sector is on solid footing.
  • The online economy will continue to expand in the future.
  • Now that remote work is more widely accepted, many employees will not be tied to higher-cost urban centers. Instead, they will have the flexibility to move to lower-cost communities, thus enabling time and money typically spent on transportation to be allocated elsewhere.

We remain cautiously optimistic about the stock market for 2021. In today's low interest rate environment, the TINA effect (There Is No Alternative) remains in place as investors gravitate towards equities to generate sufficient income to supplement lower fixed income returns. The general economic expectations to which investors have become accustomed should remain in place - modest growth, more fiscal support, and accommodative monetary policy by the Federal Reserve.

Sincerely,

Marietta Wealth Management, LLC