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Key Takeaways, Fourth Quarter 2020
By Ralph Goldsticker, CFA | 21 January 2020
Despite the global pandemic, 2020 was a good year for investors. A sharp bear market was quickly followed by an unprecedented rebound. A K-shaped recovery emerged from last year’s pandemic-induced recession. Sectors such as travel and restaurants are still struggling. Others, as exemplified by the FAANGM stocks, prosper. Treasury bond interest rates fell sharply and corporate bond spreads widened dramatically. Today, Treasury rates remain near record lows, but credit spreads have recovered to normal levels based on an improving outlook for most companies. Structured fixed income products also sold off as COVID struck, but better liquidity and cash flow visibility have since restored investor demand in those markets too. Despite continued policy support, equity markets are likely to remain volatile until various pandemic-related uncertainties are resolved. We also expect sovereign interest rates to remain at or near current low levels.
Equities
Stock markets continued their impressive rally.
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The broad US stock market gained 15% during the quarter and 21% for the year.
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After lagging for most of the year, small caps gained 31% in Q4 and finished the year up 20%. Large caps were up 12% in Q4 and 18% for the year.
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The growth-value pattern reversed during Q4 as value stocks rose 16% during the quarter, versus 11% for growth. That didn’t offset value’s underperformance in the first three quarters, as YTD growth gained 38% versus only 3% for value.
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Developed international and emerging markets gained 16% and 20%, respectively for the quarter. YTD they are up 8% and 18%, respectively.
Fixed Income
The Fed stuck to its plan of keeping interest rates low. Rates on shorter-term Treasury securities saw little change, while the improving economic outlook allowed longer-term rates to rise a bit.
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1-year Treasury yields were unchanged in Q4, while the 5-year yield rose 5 bps. At the longer end, 10-year bond yields increased 24 bps and 20-year yields moved up 23 bps.
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Credit and liquidity spreads continued to narrow during the quarter. Investment grade spreads compressed 36 bps and high yield spreads compressed 157 bps ending the only 2 bps and 24 bps wider, respectively, than pre-pandemic levels at the start of 2020. Structured fixed income products are now priced and trading back at normal levels.