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Quarterly Commentary – December 2020

The fourth quarter was strong for the US Equity Markets which continued their upward move from the March lows. Market volatility had a relative peak at the end of October and then steadily declined as the market continued to advance to all time high levels. The following are performance numbers from various popular indexes. Please remember index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar-to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 was up 18.4% for 2020. The Dow Jones Industrial Average was up 9.7%. The Nasdaq Composite Index was up 45.1%. The Russell 2000 Index was up 19.9%. International equities as represented by the MSCI AC World Ex U.S. Index were up 10.7%. The MSCI Emerging Markets Index was up 18.3%. Fixed Income as represented by the Barclays Aggregate Bond Index ended up 7.5% for the year.

It is hard to close a year like 2020 without looking back at where we have been and how much has happened in such a short period of time.  Our entire global economy and societal norms were upended by a pandemic.  Few of us thought we would ever experience this in our lifetimes. Even fewer might have predicted the behavior of the equity markets and expected that we would be closing the year at all-time highs in the face of unprecedented uncertainties.  While a lot of investors were scared in March, hindsight shows that doing nothing was better than doing something and it proved yet again that staying the course while everyone was panicking was the best course of action.  Low interest rates and abundant liquidity with a Fed that is committed to remaining very accommodative until the economy returns to its pre-pandemic levels is providing a floor to the equity markets. 

When will COVID-19 release its grip on the economy and how will things work themselves out in this post pandemic world?  Those are unknowns.  The vaccine although a game changer will not necessarily provide a shortcut to an immediate recovery.  There are likely to be stumbling blocks on the mass delivery of the vaccine and its acceptance.  There is cause for optimism at this juncture, certainly relative to where we were earlier this year, but the road ahead will not be smooth.

The economy is not yet out of the woods and despite positive surprises in the unemployment rate in November dropping to 6.7% from 6.9%, the labor market is showing signs of moderation.  The service sector being sensitive to the dynamics of the pandemic has caused hiring in the service sector to drop significantly.  Weaker labor markets usually lead to lower consumption, particularly with fading government support.  The field is very divided on the forecasted growth for 2021.  The bright spots have been residential housing.  The unique element of this situation is that some areas of the economy face accelerated expansions that may not have occurred absent the pandemic while others will lag significantly. The impact is not distributed equally and the thriving of some areas while others face a far worse fate will create larger disparities and harder to predict consequences. 

The online shopping trend which existed well before the pandemic has been accelerated with significant consumer adoption.  Although the number of Americans shopping online is estimated to have increased only marginally, the frequency and the range of items shopped for has expanded significantly.  Pre-pandemic consumer trends toward the in-person experiences such as concerts, sporting events, dining out etc.… completely reversed back to spending on material goods such as cars, clothes, home items, in home entertainment and exercise. This blindsided the supply chains.  Even if these were obvious shifts, the questions that remain are about which trends represent permanent shifts in behavior and which ones will revert, and if so to what degree will they revert. Business travel and conferences are a good example.  It seems that traditional business cycle analysis does not apply in the wake of a shock like this one as it is like trying to assess the impact of a natural disaster with relatively limited permanent damage. The situation we have today is quite different than the 2008 crisis which forced massive deleveraging and led to years anemic growth.  Now, we will likely be looking at a strong rebound with much higher growth moving forward with a backdrop of low interest rates, stimulative fiscal policy to combat the impact of the pandemic and central banks giving the green light to run above target inflation.  A recipe for tremendous opportunities despite the uncertainties.   

In Washington, a divided government is preferred by the markets as they imply less change and more predictability, that is if the Republicans retain control of the Senate.  Regardless, big legislation would still face hurdles due to a narrow majority.  Geopolitical risks will remain elevated with varying Covid-19 policies enabled by governments, rise of authoritarian approaches, political polarizations and rising nationalism which will make it more difficult for countries to find more common ground.  Countries will prioritize domestic concerns and create structural shifts toward domestic productions and more robust regional supply chains as a result of what has been experienced.  It seems the pace of change only accelerates as we move forward in time.

We are very thankful for the opportunity to serve you. Have a Happy New Year and stay safe!