SUMMARY
The markets ended the year on an optimistic note with US stocks posting substantial gains in the month of December and finishing the year at fresh record highs. European bourses such as Germany's DAX didn't share the same optimism, eking out a meagre 3.5% gain for the year, while France's CAC and the UK's FTSE were down double-digits for the year, handing the UK the worst performance since the 2008 GFC. A drawn-out Brexit negotiation resulted in late-stage concessions to get a deal across the line which rubbed salt in Britain's wounds. December also saw the US managing to avoid a government shutdown as President Trump reversed course and signed the budget and Covid relief bill into law on the last Sunday of the month. Prospects for boosting the aid package for US consumers quickly faded as Senate Republicans railroaded Trump's late push to raise direct payments to $2,000 per person.
Mass-scale distribution issues and commercial logistics seemed to dampen the positive news of another Covid vaccine gaining approval in the UK as the holiday e-commerce shipments overwhelmed shipping lines. The new and more easily spread Covid variant, first found in the UK, began to rear its head in more places amid Western nations logging spikes in new infections.
In the currency markets, the UK's Sterling rose to its best levels of the year during the final session, while the US Dollar Index remained under modest pressure. Gold was up slightly on the month but posted its best return for the year since 2011, up 31%, while WTI crude hovered around the high $ 40's/bbl.
In the final week of trading in December, the S&P gained 1.4%, the DJIA was up 1.4%, and the Nasdaq rose 0.7%. For the year, the S&P 500 added 16.3% and the Nasdaq surged 43.6%.
The 2020 Year in Review
2020 certainly was a year to remember with the Covid pandemic quickly spreading globally in Q1 and becoming the most extensive health crisis since the Spanish flu in the early 1900s. The global economy took a nosedive as many countries closed their borders, resulting in millions of people working or studying remotely from home. Unemployment worldwide surged, driving the US unemployment rate from 3.5% to 14.7% in two months. Q2 saw the US GDP suffer its largest annualised decline on record down -31.5%.
March saw global equity markets go into a tailspin with the Dow Jones Industrials declining 38% from the highs, with trading volumes surging, market-wide circuit breakers being triggered and the VIX closing at 82.69 on March 16 which is an all-time high. Yields in the treasury markets touched record lows, and for a very brief period, the short end of the curve went negative (1 month - 12 months duration).
WTI crude posted its worst performance on record in Q1, down -66%. In April, the May contract collapsed to a perplexing negative -$40 per barrel, caused by storage facilities nearing a full capacity as futures traders scrambled to close out positions. Even as WTI prices plunged in April, equities began to form a V-shaped recovery following massive amounts of fiscal and monetary stimulus from around the globe.
The US Fed reinstated its financial crisis playbook by quickly changing interest rate settings to zero and turning on the QE taps, by establishing US dollar swap lines between other major central banks and introducing a Primary Dealer Credit a Paper Credit Funding Facility.
US equity markets bottomed on March 23 after the Fed "committed to use its full range of tools to support the US economy in this challenging time," which many market participants saw as reminiscent of Draghi's "whatever it takes" speech from the 2012 Euro crisis. The Fed committed to purchasing "in the amounts needed" in treasuries and agency MBS which is practically unlimited QE.
In the months following equity markets in the US rebounded, which marked the beginning of the V-shaped recovery. April was the third-best monthly performance for the S&P 500 since World War 2. The initial rebound was characterised by the "working from home trade" with early leaders leveraged to Technology like video conferencing and housing. People migrated out of big cities on-mass and with the help of record-low interest rates, led to a surge in housing demand. June and August saw the Nasdaq and S&P 500 return to record highs respectively. We saw a rotation into value names as the market began pricing in the reopening of the economy. In the closing months of 2020, the "recovery trade" took flight following a raft of positive vaccine developments showing high efficacy rates.
The Covid pandemic worsened into the end of the year with record infections, deaths and hospitalisations all leading to harsher lockdown measures and a slowdown in economic activity. US Congress passed a $900 billion fiscal stimulus package late in December which led to equities closing the year at record highs.
Equity Market Index Performance
Looking at total return figures, the Nasdaq 100 was up +49% and the Nasdaq Composite +45% leading the pack, with Growth (+38%) outperforming Value (3%) by a notable 35% for the year on a sector comparison. The Dow Jones Industrials ended the year +10% with Value names lagging in the index as well. The Russell 2000 (+20%) and Russell Microcap (+21%) completed the year on a firm footing with each more than doubling from the lows seen in March. On a sector level, it wasn't all good news with Financials (-2%), REITS (-3%) and Energy (-34%) were the only sectors to end the year in the red. Conversely, Technology (+44%) and Discretionary (+33%) were the best performing sectors on a YTD basis.
Treasuries, Commodities and the US Dollar
In the US Treasury market, the 2Y yield declined 145 bps to 0.12% due to the Fed's change in interest rate policy. The long end of the curve bounced from the lows as the market started pricing in economic recovery with the 30Y yield declining 75 bps to 1.65% and the 10Y yield down 101 bps to 0.91%.
The Bloomberg Commodity Index fell -27% during the March lows, trading at levels not seen in 40 years, but a second-half recovery left it with only a modest decline for the year (-3.5%). On the flipside, Gold gained +31% for the year closing at $1,898, and Silver surged +48% closing at $26.40.
In the FX markets, the US Dollar Index (DXY) remained under pressure in H2 falling around -6.7% for the year and closing at 89.94 as US monetary and fiscal policy heats up and risk appetite increases. The AUD was strong performer, bouncing close to +40% from the initial March lows after trading down to 0.55 vs the USD. Bitcoin traded at new all-time highs at +305% for the year and certainly hasn't backed off in 2021.
The Months Ahead
The large monetary and fiscal response to the Covid pandemic and expectations for an economic recovery in 2021 has driven the market to fresh highs. Some market analysts see the price action as the early stages of a longer-term bull market with meaningful upside still to come.
There are still many considerable headwinds for the economy as countries try to navigate an increasingly nasty third-wave and numerous other factors relating to a vaccine rollout that could slow the recovery further. Potential supply shortfalls and implementation issues for the vaccine raise concerns, whilst the virus is already mutating to a more transmissible and lethal form.
The monetary and fiscal support in the market could limit any downside and provide a foundation for a sustainable economic recovery in the latter half of 2021. In the short-term, the market is possibly ahead of itself after pricing in a very efficient recovery which might not be the case. Sentiment measures like fund manager surveys and the CBOE put/call ratio continue to show extreme bullish sentiment, which can suggest a pullback is overdue. On a longer-term basis, momentum is to the upside, and if the vaccine rollout is effective and unchains the US economy, this might support a rising bull market in the year to come.