January 2021
US Economy: Growth likely in 2021.
Economic data continued to improve gradually: U.S. home prices are up 8% year-over-year and manufacturing expectations are at a 6-year high as the Fed ups its growth forecast for 2021. Still, worrisome trends in retail sales (-1% in Nov.) and consumer confidence (lowest since Aug.) suggest the latest Covid-19 relief package may be coming at just the right time.
US Stocks: Small stocks, biggest gains.
December was another strong positive month for equities. Most notably, after a three-month surge to finish the year, small-cap equities pulled ahead of their large-cap peers for all of 2020. While cyclical, value-oriented small stocks have led this latest rally in anticipation of a 2021 economic reopening, growth stocks still well-outpaced value stocks for the year.
Foreign Stocks: Weak dollar help.
Non-U.S. equities also performed strongly with emerging market stocks up more than 7%. For the year, a weakening U.S. dollar kept developed market returns from being flat whereas emerging market results were driven by Asia, which returned nearly 30% due to the rapid Covid-19 economic recovery in China and Korea, alongside the tech and consumer orientation of those markets.
Fixed Income: Inflation worries push up yields.
Interest rates inched upward as equity markets rallied: The yield on 10-year Treasuries finished roughly 0.1% higher than where it ended November. With rising inflation expectations due to more government spending, TIPS outperformed. Corporate bonds also performed well, with indications that defaults peaked at 9% in summer 2020 and will drop off in 2021.
Real Assets: Commodities in demand.
Commodities topped asset class returns at the end of the year, lifted by optimism around economic reopening, and substantial buying of raw materials by China driving robust returns. Copper and iron ore contracts were notably strong performers reaching multi-year highs in that category while the price of oil also rose nearly 9%.
Alternatives: Managed futures lead.
Trends stabilized in November setting the stage for strong managed future performance this month. Among those persistent trends, U.S. dollar weakness, rising equity markets and commodity recovery were the greatest factors in results across strategies. The overall hedge fund space continues to benefit from financial market repair post March.
Equities Total Return
| DEC | 3 MOS | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 3.8% | 12.1% | 18.4% |
| U.S. Small Cap | 8.7% | 31.4% | 20.0% |
| U.S. Growth | 4.9% | 12.4% | 38.3% |
| U.S. Value | 4.1% | 17.2% | 2.9% |
| Int’l Developed | 4.6% | 16.1% | 7.8% |
| Emerging Markets | 7.4% | 19.7% | 18.3% |
Fixed Income Total Return
| DEC | 3 MOS | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 0.1% | 0.7% | 7.5% |
| TIPS | 1.1% | 1.6% | 11.0% |
| U.S. High Yield | 1.9% | 6.5% | 6.2% |
| Int’l Developed | 2.1% | 4.3% | 9.8% |
| Emerging Markets | 2.2% | 6.3% | 7.9% |
| Tax-Exempt | |||
| Intermediate Munis | 0.4% | 0.9% | 4.1% |
| Munis Broad Mkt | 0.7% | 2.0% | 5.3% |
Non-Traditional Assets Total Return
| DEC | 3 MOS | 1 YR | |
|---|---|---|---|
| Commodities | 5.0% | 10.2% | (3.1%) |
| REITs | 2.4% | 8.1% | (5.1%) |
| Infrastructure | 2.9% | 14.8% | (6.5%) |
| Hedge Funds | |||
| Absolute Return | 1.4% | 2.3% | 2.8% |
| Overall HF Market | 2.3% | 4.9% | 6.6% |
| Managed Futures | 5.3% | 6.5% | 2.9% |
Economic Indicators
| DEC-20 | SEPT-20 | DEC-19 | |
|---|---|---|---|
| Equity Volatility | 22.8 | 26.4 | 13.8 |
| Implied Inflation | 2.0% | 1.6% | 1.8% |
| Gold Spot $/OZ | $1898 | $1886 | $1517 |
| Oil ($/BBL) | $52 | $41 | $66 |
| U.S. Dollar Index | 112.3 | 116.7 | 116.0 |
Our Take
As we celebrate moving into a new year and leaving behind (by most accounts) an unpleasant one, the reality is more complicated. While the daily impact of Covid-19 appears likely to taper off as vaccines roll out to local jurisdictions through the end of 2021, our battle with the virus remains the prominent risk for the months ahead. We have sequentially discussed virus containment, “flattening the curve,” and treatments. So far, efforts to combat the virus have been disjointed and the results have been less than ideal. Nevertheless, markets steadily recovered over the course of the year and investors find themselves today discussing sizeable gains versus losses.
We should expect headlines regarding vaccine distribution and effectiveness to contribute to daily market moves, especially since what appears to be a best-case scenario is already priced into stock market valuations. The U.S. stumbling in its effort to vaccinate the population is likely the greatest risk to financial markets today. Politics is also likely to continue to be a source of uncertainty with the scope of a progressive Biden administration and ongoing economic stimulus in doubt. However, some clarity will come with the results of the Georgia Senate run-offs.
Looking Ahead
Overall, as we turn the page to 2021, our outlook remains optimistic, and we continue to evaluate adjustments to improve portfolio risk-adjusted returns. As referenced above, most economic data indicate a continued recovery, albeit at a slower pace. Additionally, factors that have deteriorated recently, including all-important U.S. consumer spending, should get “a shot in the arm” through nearly $900 billion in new Covid-19 relief that extends federal unemployment benefits through March and provides $600 in cash to most Americans. On the horizon, there are signs of tremendous pent-up demand in travel, hospitality, and entertainment assuming we can bridge the near-term gap and reopen these businesses.
Going forward, we generally recommend increasing or maintaining higher equity positions at the expense of fixed income. While 2020 was certainly a banner year for many equities, some have recovered less and are better positioned to provide returns in 2021. Included in that are infrastructure equities which offer diversification, relatively attractive valuations, long-term growth potential and some protection against inflation should we see a surprise increase. We also continue to see opportunities in alternative investments, such as private equity and debt, which we believe will be important return drivers for portfolios in the coming years.
