Market Commentary for the week ending December 31st, 2020
- The major market averages all closed the year at record highs.
- Multiple all-time records made 2020 a year like no other.
- The housing market was started strong and gained momentum throughout the year.
Full Year 2020 Performance Summary
As more time passes, more records are broke and 2020 was no different. Below I highlight three historic all-time records achieved in 2020.
2020 All-Time Record #1: Shortest bear market and recovery in history
The market rallied early in the year hitting a high on February 19th before collapsing on concerns of COVID-19. In just 33 calendar days the S&P 500 collapsed -33.9%. The MAGNITUDE of this drop was certainly not historic but the SPEED at which it reached this bottom has been unmatched in modern times. Then, within a short 148 additional calendar days, it had fully recovered reaching new highs. This rapid pace of recovery was the second fastest in history.
2020 All-Time Record #2: Growth beat Value by the widest margin ever
Growth stocks, those generally with faster sales and earnings growth including most technology stocks, outperformed more conservative value stocks by +35.4% for the year. This was the widest margin in 30 years as illustrated in the accompanying graph with 2020 being the 5th of the last 6 years growth has outperformed.
Many investors today believe that growth stocks will continue to dominate the market and they may. It is worth noting though that cumulatively from 1990 – 2019 value outperformed growth and, furthermore, value has gone through its dominant cycles such as 2000 – 2006 when it outperformed for 7 consecutive years.
2020 All-Time Record #3: 10-Year U.S. Treasury Yield hits record low
Yields on U.S. Treasuries have been trending downward for 4 decades after peaking above 16% in 1981. Just as many thought they could go no lower, in August the yield dropped to a new record low of 0.508%. Although this is a record in the U.S., many countries today including Switzerland, Denmark, and Japan have negative rates. It is widely expected that rates will remain low given the guidance from our Federal Reserve in recent months.
These historic low interest rates are extremely important for investors as low interest rates make stocks more attractive. If and when rates do move higher once again, this could put some downward pressure on stock prices.
This Week’s Performance Highlights
- Large U.S. stocks posted gains in the final week of trading, up another +1.3% as measured by the S&P 500, in what was a very strong year. The S&P 500, Dow Jones Industrials, and NASDAQ Composite will all start 2021 at record levels.
Small U.S. stocks outperformed large for the year gaining +20.0% even after slipping -1.5% in the final week. This outperformance came in the final two months of the year, as the accompanying graph shows, following the first vaccine reports on November 9th and investors’ renewed appetite for more risk.
- Every sector except energy was higher for the week with the best performing being utilities gaining +2.4%. Although strong for the week, utilities were among the biggest laggards for the year.
- International stocks were overall higher for the week but with mixed results. Among developed markets, Japanese stocks were the biggest winners up +2.6% while Eurozone stocks were down fractionally impacted by loses in Spain, the U.K., and Germany.
- Emerging markets closed the year very strong up +3.1% for the week fueled by a strong rally in Chinese stocks after a relatively sizeable decline the week before.
- Gold was among the very best performers in 2020 gaining another +1.1% in the final week of trading to close the year up +24.8%. The other alternative assets were also higher for the week with commodities gaining +1.2% and real estate stocks climbed +1.6% although both were lower for the year.
- Bond prices inched higher for the week by +0.2% as yields slipped. The benchmark U.S. 10-Year Treasury yield closed the year at 0.919%. Although this is near record lows it is meaningfully above the 0.508% hit in early August as previously discussed.
2020 Performance Highlights
- The overall performance of the markets in 2020 was by no means historic but it was certainly a strong year benefitting many investors. Large U.S. stocks were higher by +18.4% as measured by the S&P 500 while the Dow Industrials lagged up just +9.7%. The real outperformer was the tech-heavy NASDAQ surging +44.9%.
- Small U.S. stocks have lagged behind large for several years but edged out a win in 2020 gaining +20.0%. As I noted in the weekly performance update below, this outperformance came late in the year.
- International stocks have underperformed U.S. stocks for several years now and continued to do so in 2020. Developed markets were higher by just +7.6% while emerging markets did better gaining +17.0%.
- Gold could be considered a surprise winner as it is normally viewed as a safe-haven when other investments are moving lower. That was not the case in 2020 as gold surged +24.8% while most everything else rallied as well. Furthermore, gold has often performed well during period of higher inflation which has also not been the case in 2020.
- Commodities and real estate stocks were both lower for the year arguably due to COVID-19 and a potentially weakening economy.
- Bond prices climbed +7.7% as yields fell as discussed above.
U.S. Housing Market Update
The housing market remained remarkably strong in 2020 and picked up momentum as people desire larger homes outside of cities following the pandemic. The average home price, according to the Federal Reserve, climbed to $465,840 and is up +8.4% year-over-year according to a separate report.
There are some concerns that housing may be in a bubble but others are arguing that’s not the case. One indicator pointed to suggesting we’re not experiencing a bubble is the months of supply on the market. As the graph below shows there is just 4 months supply of homes on the market today which is near a record low and a far cry from the peak above 12 months during the bubble more than a decade ago.
In addition to a low supply of houses on the market, low interest rates make homes more affordable, incomes are rising, and there is expected to be increasing demand from a younger generation. All of this could help keep the housing market strong.
There was very little economic data reported during the shortened holiday week.
The S&P Case-Shiller Home Price Index surged in October, the most recently month reported, by +8.4% over the same period a year ago fueled by record low interest rates and tight supplies. The biggest price gains were in Phoenix (+12.7%, Seattle (+11.7%), and San Diego (+11.6%) while New York, Chicago, and Las Vegas lagged behind with gains all in the +6% range.
The Chicago Purchasing Managers Index, a measure of business conditions in the Chicago area, increased for the first time in three months to a reading of 59.5 from 58.2 the month before. A reading above 50 indicates economic expansion. The improvement in the Chicago was contrary to readings in New York and Philadelphia leading economists to believe we are experiencing a broader slowdown.
Initial Jobless Claims declined by 19,000 from the week before to 787,000 while continuing claims via state programs dropped by 103,000 to 5.22 million. Initial claims have remained persistently high compared to the average of just over 200,000 per week pre-pandemic.
Upcoming Economic Reports
- Employment Report
- Motor Vehicle Sales
- Factory Orders
- Initial Jobless Claims