2020 | Year End Review

Stock markets around the world surged in the fourth quarter as investors remained upbeat on the prospect of a return to more normal economic conditions with the beginning of vaccine distributions and the continued monetary support from central banks. Even election concerns and a resurgence of the virus could not halt the stock rally.

The S&P 500 returned roughly 12% for the quarter and over 18% for the year despite the late year spike in Covid cases and renewed shutdowns of businesses in some states.  Stocks across all asset classes rose during the quarter and particularly those more leveraged to an improving economy.  Small and mid-size company stocks returned 31% and 24% respectively and outpaced the S&P500 on the belief that the economy will accelerate its recovery in the second half of 2021 as the majority of the population is vaccinated. International stocks also performed well, especially emerging markets, on Covid recovery hopes as well as the prospect of lowered trade tensions.

The strongest performing sectors of the market were those that will benefit the most from a return to normal economic activity and a rebound in demand.  These included most cyclical areas of the stock market, but in particular, energy, financials, and industrials.  More defensive areas of the market such as healthcare, consumer staples, and utilities lagged the overall market but still had positive gains for quarter.  Technology stocks continued to perform well and were the leading sector for the entire year.  The information technology sector was up nearly 44% for the year and was driven primarily by large tech stocks that benefited from the trend (due to the pandemic) to work, shop, and engage in entertainment activities from home.

Bond markets also produced positive returns as fixed income securities in sectors besides Treasury bonds continued to recover from the effects of the pandemic.  Areas such as investment grade and high yield corporate debt outperformed as buyers looked for higher yielding bonds and became more confident in an economic recovery.  While 10-year Treasury yields have risen to slightly above 1% by year end, the Fed has maintained its’ stance that it will keep rates low at least over the next two years. 

The role of the Fed and its policies of low interest rates and purchases of debt instruments in the open market in fueling the market rally in stocks and other assets seen since last March should not be underestimated.  The plan of supporting the economy and markets with monetary liquidity until they can recover from the pandemic has been extremely effective so far.  What remains to be seen is what the economic situation will look like as we move through 2021.  Even though we have seen large recoveries in GDP and employment in the second half of 2020 the long-term effects of the pandemic on the economy and certain industries are something we will be carefully monitoring this year.

Looking forward we expect the economy to continue to improve.  Effective vaccines have been produced and distributed in record time and fiscal and monetary policy remain stimulative.  The recent election produced a change in control of the presidency as well as narrow control of both houses of congress to the Democratic party.  We expect congressional cooperation on further stimulus packages and infrastructure spending.  We will be watching for major changes in tax policy and business regulation, areas that could affect the markets the most.  

We are still maintaining a higher allocation to stocks even with the possibility market volatility due to adverse pandemic news or policy changes because real yields on bonds are still unattractive to long-term investors. Given the amount of fiscal and monetary stimulus, higher inflation is a real possibility and bonds could produce negative returns under that scenario. While technology has been a major driver of the market, some companies have valuations that have become high by historical standards Our focus will continue to be finding companies and market sectors that that that will thrive over the long term no matter what the short-term fluctuations in the market and economy.   

As always, please call with any questions.

Jonathan F. Kolle, CFA
President

Joseph K. Champness
Managing Director

Shawn R. Keane, CFP®
Vice-President

Rusty Giles
Director of Marketing

The foregoing content reflects the opinions of Smithbridge Asset Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.

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