Fidelity Bank - Wealth Management
2020 Market Review
As books closed on 2020, the S&P 500 posted another positive month returning 3.84%. 2020 provided market turbulence, angsts, and anxieties which were led by the unknown economic constraints of COVID-19 and heated US election amid the pandemic. Beginning in February, equity and credit markets sold off aggressively as the coronavirus panic gripped hold of the market’s animal spirits, bringing to an end the longest bull equity market in history (March 2009 – March 2020). In just 15 trading days (2/20 – 3/11), the S&P 500 fell more than 20% entering bear market territory at the fastest pace on record. In total, from February 19th to March 23rd, the S&P 500 fell nearly 35%.
As equity and credit markets sold off, Treasury Bonds rallied as a flight to safety trade, and as the Federal Reserve cut interest from 2.25% to 0.25% in early March. To help cull the bleeding in markets and restore confidence, Federal Reserve and Federal Government initiated monetary and fiscal stimuli through lending and bond buying programs, and the CARES Act. As the panic subsided, equity and credit markets began to rally. Advancements in treating Covid-19, economic reopenings, and hope of and eventual market launch of two effective vaccines have helped buoy and drive markets higher through the rest of 2020. The S&P 500 rallied more than 70% off its March 23rd low to finish the year up more than 18.40%. Treasury Bonds, which hit their high-water mark in August 2020 (+10.08%), were up 8.00% for 2020.
Economy
Institute of Supply Management PMI surveys, which tracks sentiment among purchasing managers at manufacturing, construction and/or services firms, collapsed to contraction levels not seen since the Global Financial Crisis in March and April. A PMI reading above 50 indicates expansion, while below 50 indicates contraction. After contraction readings from March through May, the PMI surveys rebounded and posted 7 straight months of expansion readings to end the year at 60.7, the highest reading since 2018.
After the largest ever monthly job losses of 1,373,000 million in March and 20,787,000 in April, the US economy added an average of 1,780,000 jobs in May through November. In December, as many states and regions implemented new Covid-19 restrictions and protocols, the US economy lost 140,000 jobs, the first monthly loss since April. If we dive into the sectors driving the report, Food Service and Accommodations lost 395,600 jobs and Leisure and Hospitality lost an astounding 498,000 jobs. In November, both of the sectors added 26,500 and 75,000 jobs, respectively. If these two sectors, which are exceptionally impacted by Covid-19 restrictions, are excluded from the jobs report, the US Economy added more than 750,000 jobs in December.
Equity
For first time since August, Large Growth stocks beat Large Value stocks by 77 bps in December. However, for the 4th quarter, Value Stocks outperformed Growth stocks across market cap. Large Cap Value beat Large Growth by 4.86%; gaining 16.25% while Growth gained 11.39%. Small Cap Value beat Small Growth by 3.75%; gaining 33.36% while Small Growth gained 29.61%. For the year, Growth beat Value by a wide margin across market cap. Large Growth outperformed Large Value by 35.69%, while Small Growth beat Small Value by 30%. On almost every valuation metric, Growth Stocks are historically overvalued versus Value Stocks. An uptick in inflation and interest rates combined with low valuations may act as a significant tailwind for more Value Stocks in the year ahead.
All 11 of the Global Industry Classification (GIC) sectors were positive in December. Financials, Technology, and Energy were the leaders gaining 6.28%, 5.74%, and 4.48%, respectively. On a year-to-date basis, Technology and Consumer Discretionary Sectors were the big winners gaining 43.89% and 29.75%, respectively. With low rates, tepid demand, and changes in consumer habits, Financials, Energy and Real Estate ended the year lower than they started. Financials lost 1.69%, while Real Estate lost 2.09% and Energy Sector suffered the largest loss, losing 32.84% in 2020.
The Dollar Index, which measures the US Dollar against Developed Market currencies, lost 6.75% in 2020 as slashed interest rates, weakened global trade, a deluge of dollars from monetary and fiscal stimulus programs entered the global financial system. In December alone, the US Dollar weakened 2.10% against Developed Markets and weakened 1.64% against Emerging Market currencies. In December, the MSCI EAFE index gained 2.47% in local currency terms but gained more than 4.65% in US Dollar terms. Year-to-date the MSCI EAFE gained 11.35% in local terms and more than 16.35% in US Dollars. A resolution to the seemingly never-ending Brexit saga was finally achieved. On Christmas Eve, the UK and the European Union agreed to a trade deal that allows for tariff-free trade while providing political, economic, and monetary independence for the UK.
The MSCI Emerging Markets Index gained 6.07% in local currency and the conversion to US Dollars increased that gain to 7.35% for US investors in December. It was a similar story for US Emerging Market investors on a year-to-date basis; the MSCI EM Index returned 16.02% in local currency for 2020, while the conversion to US dollars increased the return to 19.70%. Emerging markets valuations continue to be attractive versus US equities. Increases in energy prices, a weakening US Dollar, and rising inflation are all signs that bode well for Emerging Market investors.
Fixed Income
Treasury prices posted a strong year-to-date return of 8.00%. After rates bottomed and prices peaked in early August (Bloomberg US Treasury Index 8/4/2020: +10.08% YTD), rates proceeded to rise at every maturity from 2 years to 30 years. The 10-, 20-, and 30-year maturities rose by over 40bps each.
As spreads fell from their March highs, Bloomberg Investment Grade Corporate Bond Index gained 9.89% and Bloomberg High Yield Corporate Bond Index gained 7.11% on a year-to-date basis. Investment Grade and High Yield spreads ballooned to 3.81% and 11.00%, respectively on March 23rd. From there, both Investment Grade and High Yield spreads proceeded to contract by roughly 70% by the end of 2020. As of December’s end, Investment Grade Corporates and High Yield Corporates had option adjusted spreads of 1.02% and 3.60%, respectively, as compared to Treasury bonds.
Treasury Inflation Protected Securities (TIPS) ended the year as the best returning fixed income asset class. On a year-to-date basis, TIPs outperformed nominal Treasuries by 299 basis points (+10.99% vs. 8.00%). Ten-year inflation expectations bottomed in March as market participants priced in expected inflation of only 0.55%. The Federal Reserve continues to target a long-term 2.00% inflation goal and has indicated a willingness to allow inflation to trend above 2% in the short-term. As of the end of December, ten-year market implied inflation ended the year remarkably close the Fed’s target with a reading of 1.99%.
Real Assets
Commodities posted another strong return of 4.97% in December; however it was not enough to push Commodities into positive territory for the year. Commodities ended 2020 down, 3.12%. Precious Metals, Agriculture, and Industrial Metals led the way in 2020 advancing 25.60%, 16.48%, and 16.33%, respectively. Energy, which is the largest part of many commodity indices, including the Bloomberg Commodity Index, lost 42.72%. WTI Crude Oil had a wild and record-breaking year. On April 20th, what some may call an interesting phenomenon and what others may call a panic occurred in the WTI Crude Oil market. The WTI Crude Oil futures contract for May 2020 delivery of expired on April 21. This meant that the trader who owned the contract at close of trading on April 21st was required to take physical delivery of the crude oil. One contract is 1,000 barrels of oil. Due to the abrupt economic slowdown caused by government restrictions in response to COVID-19, the demand for crude oil plummeted. This demand shock caused crude oil storage space to become scarce. Capacity in storage facilities in Cushing, OK, the delivery hub for WTI Crude Oil, was nonexistent. On April 20th, the second to last day of trading of the May 2020 contract, this storage shortage caused the price fell as low as negative $40.32 intraday and closed the day at negative $37.63. This meant the traders trying to sell a contract were paying the next buyer of the more than $37,000 per contract to take the oil off their hands! The next day, at the expiration of the contract, prices rebounded and closed at positive $10.01/barrel. WTI Crude Oil rebounded throughout the year as the economy reopened and energy demand increased. WTI ended December trading at $48.52/barrel.
Real Estate Investment Trusts (REITs) finished the year lower by about 5.10%, as confidence in the economic recovery, tenants’ ability to meet rent and mortgage payments, and the behavior of leery consumers weighed on the asset class. However, the asset class gains of 9.22% in November and 2.45% in December were not enough to bring the asset class into positive territory for the year, despite the positive vaccine news and consumer data.
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2020 Market Review is intended solely to report on various investment views held by Fidelity Deposit & Discount Bank and is distributed for informational and educational purposes only and is not intended to constitute legal, tax, accounting, or investment advice. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Fidelity Deposit & Discount Bank does not have any obligation to provide revised opinions in the event of changed circumstances. All data is provided by Bloomberg Finance, LP and Morningstar Direct. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Data, if not otherwise noted, is as of 12/31/2020. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is no guarantee of future results. All investment strategies and investments involve risk of loss and nothing within this report should be construed as a guarantee of any specific outcome or profit. Investors should make their own investment decisions based on their specific investment objectives and financial circumstances and are encouraged to seek professional advice before making any decisions. Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large‐cap segment of the U.S. equities market.
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