Stocks continued to rally in December, with several bull market laggards exhibiting outperformance. U.S. small and mid-sized stocks, along with international stocks, outperformed large U.S. stocks in the month, gaining in the mid-to-high single-digit range. Despite COVID-19 cases and hospitalizations surging in December, investors see a light at the end of the tunnel with vaccine distribution and inoculation rolling out in the U.S. This suggests economic growth may ramp significantly in the second half of 2021 and first half of 2022. With interest rates remaining low and prospects for an improving economy, investors continue to look favorably upon the stock market.
While we typically review the past month’s events, we believe it may be helpful to look briefly back at 2020 as a whole. Putting aside the human element of this pandemic, this was an amazing year for the financial markets! Investors suffered a quick, painful selloff early in the year and then relished in a sharp, full recovery in stocks, all in a six-month period. The disconnect between the real economy and the stock market was in full display in the second half of 2020. Stock markets typically lead economic activity, as investors look ahead to future economic growth to price stocks today. The stock market rally since March 2020 reflects investor optimism about an economic recovery once the pandemic ends.
There are risks to a smooth economic recovery, like a slower than expected vaccine immunization program or rapidly rising interest rates. However, near-term fiscal stimulus should buttress any potential fits and starts to economic recovery. You should be aware, though, the S&P 500 has annually experienced an average 13% intra-year decline over the past ten years, from as little as a 3% intra-year decline in 2017 to a 34% intra-year decline in 2020. In many cases, these selloffs are triggered by events difficult to predict, but should be expected, nonetheless.
Looking ahead, several market strategists and sociologists describe the next few years as possibly the beginning of a new Roaring 20’s. In the aftermath of World War I and the 1918 Flu Pandemic, the U.S. experienced a surging economy and mass consumerism – the original Roaring 20’s! Some of the same conditions appear to be in place for strong economic recovery over the next several years. When the pandemic ends, millions of people in the U.S., and globally, will want to resume social activities, meaning massive consumer spending. This may have a powerful, stimulative effect on the U.S. economy, the timing of which remains uncertain. While we would be remiss not to remind investors the Roaring 20’s ended with the Great Depression of 1929, we don’t want to leave the economic party before it gets started.
Our investment process is designed to be less negative when things look bleak and to be less optimistic when things look rosy. Sticking to our investment discipline, this means there may be opportunities to adjust your portfolio this year after a market rally and meaningful divergences in several asset categories.
But first, we need to recover from this pandemic and take the necessary healthcare precautions, including getting the COVID-19 vaccine when it is available and if you desire to do so. We wish everyone a safe, healthy and prosperous New Year. We also want to express our gratitude for the opportunity to serve you and your families this year, as many of you have endured challenges, both personally and in your businesses in 2020. Like many of you, we are looking forward to a better 2021!
Please feel free to contact us at 513.791.9258 (Blue Ash) or 513.863.4015 (Hamilton) or inquire about setting up a video call to safely discuss any investment issues or planning matters!