Despite a year defined by a global pandemic and political uncertainties, financial markets proved resilient, with the major indices finishing the quarter, and the year, at or around all-time highs. The S&P 500 Index moved 12.14% higher in the fourth quarter, resulting in an overall gain of 18.39% for the index in 2020. The nationwide rollout of two COVID-19 vaccines, coupled with greater clarity regarding the country’s political backdrop, calmed market angst and set domestic equities up for a rally into the latter part of the quarter. Contributing most to the broader market’s rise were cyclically oriented sectors, led by energy and financials. On a market-cap basis, small-caps fared substantially better than large-caps in the fourth quarter and outperformed on the year. Finally, the long-standing trend of growth stocks outperforming their value counterparts reversed this quarter, with value exhibiting its best quarter since 2009.
International equities from both developed and emerging market regions moved higher, outperforming domestic equities during the fourth quarter. Despite some countries still facing restrictive measures relating to the pandemic, a falling dollar and an overall increase in global trade activity proved beneficial to emerging markets. China was a significant contributor to emerging markets performance due to strong demand for medical supplies and tech products, particularly in the month of November. Within developed market economies, a relatively slower recovery had unfolded over prior periods but began to pick up during the fourth quarter. All told, the MSCI Emerging Market Index returned 19.61% versus a 16.09% gain in the developed market composite.
Although monetary policy went relatively unchanged during the quarter, the fixed income space continued to be guided by ultra-accommodative central bank policies put in place during the pandemic. The Federal Reserve reiterated keeping its discount rate at zero percent through the end of 2023, providing further stimulus to a post-pandemic economic recovery. That said, the yield curve moved only modestly, with the U.S. 10-Year Treasury Note yielding 0.91% at quarter’s end, up slightly from the prior quarter’s 0.68% yield. In the corporate bond market, both investment-grade and high-yield spreads tightened as investors continued to price in the expectations of improving corporate profitability over the near term. Against this backdrop, corporate bonds outperformed government issues.
Outlook: Even through the worst of the pandemic, equity markets showed shocking resiliency in 2020, ending the year at or near all-time highs. While one may scratch their head at this, it is important to note that markets are partially a forward-looking mechanism, pricing in future expectations today. At the same time, markets are in many ways a bit removed from the “Main Street” U.S. economy, a dichotomy that continues to play out. That said, one factor in markets’ continued grind higher has been the shifting of discretionary income away from pandemic-ridden travel and leisure categories toward saving and investing.
Moving forward, we at Condor remain cautiously optimistic about the state of financial markets. We expect that equity markets in 2021 will be somewhat guided by news of vaccine developments and the ability to effectively distribute it across the country. We expect that the progress of vaccine distribution will be a key market driver through the first half of the year, with the second half being largely defined by the country’s ability to spur a return to normalcy. Additionally, and perhaps most importantly, the slew of monetary and fiscal stimulus measures over the prior months should continue to provide assurance to the health and durability of markets and the economy. Monetary stimulus by the Federal Reserve has been of particular importance to the stock market, as accommodative measures, such as low interest rates and expansive bond-buying programs, provide a backdrop to investor confidence. Expect a continued dovish stance out of the Federal Reserve through and beyond 2021, creating further stability.
Valuing transparency, we would be remiss if we did not inform investors that the returns exhibited in the equity market over the prior two years are more of an anomaly than a norm. This is not to say that we believe 2021 will not produce strong returns, but we believe investors should put into context historical data to help guide future expectations. Equity markets have returned on average 10% over the prior 90 years, with some years returning higher or lower than that amount. To that end, a case can be made that the current market cycle has sped ahead of the economic cycle. However, we would note that the peak of the current economic cycle is yet to come, thus giving way to another potentially strong year for financial markets.
Finally, as we move into a new year, it is important to not forget what can be learned from 2020. This year has reminded us of the unexpected nature of not just the stock market, but of life’s challenges more broadly. Perhaps most importantly, it reminded us that we can face these adversities and grow through them together. At Condor, we place great emphasis on togetherness, and whether it be financially or at times even personally, we aim to be there alongside you to help you achieve your long-term goals and objectives. We extend our sincere gratitude and appreciation for entrusting in us with these duties and come into the new year with a sense of thanks and optimism.