December 2020
US Economy: Signals flashing green (mostly).
Gains in consumer confidence have slowed and lapsing government COVID benefits have hit personal income (-0.7% in Oct.), but other US data have stayed positive. Official unemployment was recently down to 6.9%, lower than expected, despite higher labor force participation, while positive manufacturing and real estate data continue to signal a healthy base.
US Stocks: Vaccine = double-digit gains.
Given an overall positive economic backdrop and announcements from Pfizer and Moderna of highly successful vaccine trials, US equities rallied sharply in November, with small-cap companies (+18%) the strongest performers. Value and cyclical stocks also outperformed, with average gains in the large-cap energy sector approaching 30%.
Foreign Stocks: End-in-sight lift.
Non-US equities performed strongly, as developed market stocks rose nearly 16%. As in the US, investors began to opt for value-oriented opportunities in countries disproportionately beaten up by the pandemic, with Italian and Spanish equities rising 27% and 30%, respectively. A weakening US dollar was another modest contributor.
Fixed Income: With rates stable, credit rallies.
Fixed-income securities are holding up well, as Treasury yields finished near where they began November. A “blue sweep” by Democrats in the US elections failed to materialize, lessening the possibility of massive fiscal spending driving up borrowing costs. High-yield bonds benefited from heightened investor risk-taking as credit spreads continued to tighten.
Real Assets: Infrastructure comeback.
Infrastructure, which had trailed the broad equity markets in the recovery, benefited from attractive valuations, higher energy prices and expectations that hard-hit airport and toll-road operators might see a quicker return to normalcy. Despite recent positive results, infrastructure continues to offer compelling valuations and inflation protection.
Alternatives: Equity strategies on top.
Equity long-short strategies were up nearly 5% capturing roughly half of the return of the greater US equity markets. Event-driven strategies were up roughly 2% on credit-spread tightening plus acceleration in merger activity in the last few months, which has provided a broader opportunity set for managers.
Equities Total Return
| NOV | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 10.9% | 14.0% | 17.4% |
| U.S. Small Cap | 18.4% | 10.4% | 13.6% |
| U.S. Growth | 10.7% | 31.8% | 35.7% |
| U.S. Value | 13.8% | (1.2%) | 1.6% |
| Int’l Developed | 15.5% | 3.0% | 6.4% |
| Emerging Markets | 9.2% | 10.2% | 18.4% |
Fixed Income Total Return
| NOV | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 1.0% | 7.4% | 7.3% |
| TIPS | 1.1% | 9.7% | 10.1% |
| U.S. High Yield | 4.0% | 4.2% | 6.4% |
| Int’l Developed | 1.9% | 7.6% | 8.3% |
| Emerging Markets | 2.6% | 5.6% | 7.8% |
| Tax-Exempt | |||
| Intermediate Munis | 0.7% | 3.7% | 4.1% |
| Munis Broad Mkt | 1.5% | 4.6% | 4.9% |
Non-Traditional Assets Total Return
| NOV | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 3.5% | (7.7%) | (3.1%) |
| REITs | 9.2% | (7.4%) | (6.8%) |
| Infrastructure | 12.9% | (8.5%) | (4.5%) |
| Hedge Funds | |||
| Absolute Return | 1.0% | 1.5% | 2.2% |
| Overall HF Market | 3.0% | 4.4% | 5.7% |
| Managed Futures | 1.9% | (1.6%) | (2.3%) |
Economic Indicators
| NOV-20 | MAY-20 | NOV-19 | |
|---|---|---|---|
| Equity Volatility | 20.6 | 27.5 | 12.6 |
| Implied Inflation | 1.8% | 1.2% | 1.6% |
| Gold Spot $/OZ | $1777 | $1730 | $1464 |
| Oil ($/BBL) | $48 | $35 | $62 |
| U.S. Dollar Index | 113.5 | 121.3 | 117.2 |
Our Take
We enter the final month of 2020 with most of the year spent attempting to avoid serious illness and otherwise living under the constraints of COVID-19. If that weren’t enough, it would be an obvious understatement to say the year was marked by uncooperative politics and social unrest. With all that uncertainty, it is remarkable then to look back and evaluate the financial market results to date. Equities have produced robust returns in aggregate, with stocks both at home and abroad up double digits in many instances. Meanwhile, fixed-income investments have also produced relatively strong returns for investors. Over the last several months, we are glad to have steadily increased our equity positioning after taking steps to protect portfolios in the early part of the year. As we turn the page to 2021, our outlook remains optimistic as we evaluate adjustments to improve portfolio risk-adjusted returns.
Are there reasons for caution? Certainly. Politics remain a worry but less so than this fall: control of the Senate remains undecided and additional COVID-relief aid remains in gridlock. We do believe more federal aid is necessary, but any significant deterioration in economic data will likely force the hand of Congress. Equity valuations are also stretched by some measures. However, with an end to the economic impacts of COVID now on the horizon, there remain strong opportunities even in asset classes that have seemingly performed very well in 2020.
What We’re Doing
Going forward, we generally recommend increasing equity positions at the expense of fixed income. However, the sectors that we are focused on are those that have, until more recently, recovered less than others since the onset of the virus and consequently still have the most room to run. Included in that are value stocks, which are likely to be more sensitive to economic reopening as well as non-US equities and small-cap stocks, both of which offer the most attractive valuations. We will also continue to source alternative investments, such as private equity and debt deals, which we believe will be important return drivers for portfolios in the 2020s.
