Equity Overview

Equity markets took a wild ride in 2020.  After a promising start, the S&P 500 fell 34% from its February high, only to rebound more than 67% from its low by year’s end.

All the major indices finished the year at or near all-time highs.  But the gains were not uniform, as growth stocks rose by more than 30% while value stocks rose about 2%.  Technology stocks (up 42%) and Consumer Discretionary stocks (up 28%) led the sectors, while Energy stocks got slaughtered (down 37%).

Major international stock markets in China, Japan, and Germany showed solid double-digit gains, while Britain suffered Brexit shock and lost 10%.

Macro Overview

2020 will be remembered as the year of the pandemic.  It wrought biblical-level suffering and remains the dominant concern in economies worldwide.  In the US, inept response by the executive branch exacerbated the impact.  Fortunately, the Fed controlled monetary policy with a steady hand, bringing short-term interest rates to near zero, entering the bond markets in unprecedented fashion, and indicating its intention to maintain its easing for as long as necessary.  In addition, the legislature passed massive fiscal stimulus early on, supplemented with additional stimulus at year’s end.

The result was that the broad economy survived.  GDP, which contracted more than 30% on an annualized basis in the second quarter, rose by more than 30% in the third quarter.  But much damage has yet to be repaired.  At year’s end, unemployment remained at historically high levels, the numbers out of work for more than 6 months were growing, and millions had left the work force altogether.  Entire sectors were devastated, including travel and restaurants.  Consumer sentiment, while improved from the lows in mid-year, remains at historically depressed levels.

One bright spot was the unprecedented speed with which vaccines were developed.  The time from inception of research to distribution of vaccines was reduced from the usual period of about 10 years to an astonishing 10 months.  Along with the beginning of widespread vaccination came hope that substantial economic recovery would follow.

In the midst of all this, of course, we had elections for congress, the senate, and the presidency.  Democrats hit the trifecta and now control all three branches of government.  This makes it likely that we will see a more comprehensive pandemic strategy and additional fiscal stimulus.

The US has recovered from significant economic shocks on numerous occasions in the past, most recently in 2001 and 2008.  While it is far from certain, it appears that we may be on a path to return to some semblance of normalcy.