The global COVID pandemic was a “black swan event” – an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences – and caused the biggest quarterly drop in GDP and increase in unemployment since the Great Depression. The collapse of the U.S. stock markets from all-time highs to more than 30% down, occurring from February 18 – March 23, was one of the fastest in history. There were other firsts – oil prices went temporarily negative, market volatility exceeded that during the 2008 financial crisis and the Federal Reserve took unprecedented measures to support the plummeting U.S. economy. In short, nothing about 2020 was normal.
Despite devastating health and economic crises, the financial markets performed incredibly well in 2020. For example, the S&P 500 gained 18.40% while its blue-chip counterpart, the Dow, rose 9.72%. The big winner for 2020 was clearly the NASDAQ, posting a whopping 44.92% gain. The difference in returns, however, does attract some attention. A deeper look into the Dow saw some stocks, Boeing in particular, dragged on its performance. The technology sector of the S&P 500 helped it post a gain almost twice that of the Dow. The tech-heavy NASDAQ benefited from the stay/work-at-home economy brought on by COVID.
International stock markets generally did not quite fare as well as in the U.S., primarily restrained by economies in Europe hit particularly hard by COVID lockdowns. The MSCI EAFE Index (Europe, Australia and the Far East) returned 7.82%. Benefitting from the falling U.S. dollar were the emerging markets, measured by the MSCI EM Index, rose 18.31% in 2020.
Our outlook for 2021 sees a slow return to economic and lifestyle normalcy, which we believe will serve as a tailwind for many investment assets. Further advancements in COVID testing, contact tracing and vaccine development should gradually reduce the need for business restrictions and promote economic growth. Additional federal stimulus, however, will be needed to support the still fragile economy in the short run.
The road to recovery is likely to be a bumpy ride, and we do see the potential for considerable market volatility at times throughout 2021. As such, our managed portfolios will remain broadly diversified, “tilted” toward asset classes that we believe will produce solid returns in a recovering economy balanced with positions that add stability to the portfolio. We favor a moderate risk-on posture but see the potential for both upside and downside surprises. Investment management in 2020 was an “all hands on deck” process, and we see 2021 as being no different!