January 5, 2021
December was another very good month for stocks across the globe. This strength was, to say the least, a welcome way to close out a year in which the market had experienced staggering drops and unexpected, euphoric highs. The S&P 500 Index was up 3.84% for the month and closed the year at an all-time new high. This was one of only 8 times in history the index closed the year at an all-time high as well as marking the shortest time span between such peaks. Previous closing year highs occurred in 1928, 1954, 1958, 1963, 1991, 1999, and in 2013.
The Dow Jones gained 3.41% in December while the NASDAQ was up 5.75%. Small cap stocks continued to lead this month as is evident with the Russell 2000 Small Cap index up 8.65%. International stocks also participated nicely in December led by emerging market stocks as represented by the MSCI Emerging Markets Index gaining 7.25%.
It has been a unique and challenging year indeed, but U.S. stocks posted records despite the pandemic. On a total return basis, the S&P 500 rose 18.4%, the Dow Jones Industrial Average gained 9.31%, and the NASDAQ Composite climbed 44.26% in 2020, marking record highs and producing the shortest bear market in history, despite the repeated threats of COVID shutdowns, highly elevated unemployment rates, and election year uncertainty. By month’s end a newly negotiated and highly anticipated stimulus package had been signed into law and initial funds had begun being distributed.
With unprecedented stimulus and the Federal Reserve’s extraordinarily accommodative monetary policy market participants seem to be pricing in prolonged benefits of such favorable economic support that will likely keep rates low for quite some time and provide a tail wind for stocks. Indeed, the central bank has made it clear it anticipates no rate changes until at least 2023.1
However, the uneven gain in stocks is somewhat troubling. The swift economic shift related to pandemic shutdowns and travel restrictions has negatively impacted many areas of the economy like travel, hotels, and retail stores while other areas of the economy have benefited from this shift.
The stock market’s rise was uneven as well and very top heavy, favoring technology above all else with certain consumer staples (notably shelf-stable foodstuffs and hygiene products) also performing very well. Apple, Amazon, and Microsoft accounted for over 53% of the S&P 500’s total return in 2020.
And, if you removed the top 30 stocks from the index the S&P 500 would have actually been negative (-0.03%). The Energy sector of the S&P 500 declined -37.71% this year while the Information Technology sector increased 42.21% creating an almost 80% spread between the top and bottom sectors.
This is the largest such spread during a stock rally since the Tech run up in 1998 & 1999. Fortunately, news of a vaccine being administered has—incongruously—offset a certain amount of market concerns of a second wave of infections and restrictions, even as COVID-19 infections and hospitalizations set records. This has allowed for broader market participation in the closing months of 2020.
Even so, we know that the stock market is not the economy. While the U.S. has grown uncomfortably accustomed to unemployment numbers fluctuating more than usual—and there were marked signs of improvement throughout 2020—the most recently available numbers still show that long-term unemployment (i.e., 27 weeks or longer) is 36.9% of total unemployment.2
The national moratorium on evictions was extended with the President’s signing of the new $900 Billion stimulus package. The bill also includes $25 billion for emergency rental assistance. While neither are perfect measures, they may hopefully provide some necessary breathing room for those who have been holding their breath while congress seemed to take its time passing the bill.3
As we head into a new year and happily say good bye to 2020, we are hopeful that the vaccine can help alleviate fears and the economy can get back on track. However, we believe it wise to remain cautiously optimistic. No one knows, nor can anticipate, exactly what kind of curve balls may be thrown at us this year. We will likely see new legislation proposals that in some cases may cause market shocks, but we are also aware that the Federal Reserve accommodative policy remains a tail wind for stocks. We are encouraged by the broader participation in the stock rally we have witness over the past couple of months.
As we entered December both our long term & shorter term technical models were in decidedly positive territory, and they remained there throughout the month. Similarly, as we enter 2021, the technical picture is currently favorable.
Brad Thompson, CFA
Chief Investment Officer
1https://www.forbes.com/sites/jjkinahan/2020/12/16/a-no-surprise-no-change-from-the-fed-zero-rates-projected-through-2023/?sh=3e962dc85652 Published December 16, 2020; Accessed January 4, 2021
Published December 2020; Accessed January 4, 2021
Published December 22, 2020; Accessed January 4, 2020
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.
The S&P 500® Total Return Index is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index. As a total return index, it assumes reinvestment of all cash distributions.
The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
The MSCI Emerging Markets Index consists of 23 economies including Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates. The MSCI is a float-adjusted market capitalization index.
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