2020 Year End Market Commentary

The past year felt like it lasted a decade, with no shortage of adjectives to describe what we collectively experienced during 2020 – Unprecedented, Surreal, Chaotic, Relentless…

Perhaps, it is more apropos to use the term “Quickest” to better define the year. After all, the U.S. experienced the quickest - bear market on record, spike in the unemployment, monetary and fiscal stimulus on record, stock market rebound, and vaccine ever created. It should not be surprising that the capital markets concluded the year with a stellar fourth quarter. The broader equity markets measured by the S&P 500 and MSCWI rocketed up 12.2% and 14.7%, respectively.[1] Back during the dark days of March and April, few would have speculated that the S&P 500 and MSCI ACWI would rise 18.4% and 16.3%, respectively for the year.[2] Despite all we have and continue to endure, society and the economy continue to march forward.

While the world experienced a synchronized global recession during the first half of the year, optimism abounds with the prospects of a global expansion in 2021. Stocks anticipate and generally lead an economic recovery. This was evidenced by the material outperformance from the early-cycle areas of small-cap and emerging markets equities, which rose 31.4% and 19.7% for the fourth quarter, respectively.[3] The anticipated release of pent-up corporate demand and consumer savings is forecasted to fuel global growth of 5.8%, according to Ned Davis Research. On the U.S. front, GDP growth is forecast to rebound up to 4.2%, which would represent the largest surge in productivity since the year 2000.[4] The U.S. resurgence is bolstered by renewed fiscal stimulus, accommodative Federal Reserve policy, and optimism for a successful vaccine rollout. Ultimately, expectations for robust corporate earnings growth in 2021 and ample Fed induced liquidity are driving stock markets and remain the linchpin for continued market growth.

Source: Goldman Sachs Global Investment Research. As of November 16, 2020.

We assess the current environment through the prism of our asset allocation framework and the underlying indicators we monitor. Over the course of the quarter, our research affirmed a decidedly positive market environment, which has historically been associated with strong equity returns. We use several independent data providers to create our mosaic of the current investment landscape. Given that the weight of the evidence was decidedly positive, we increased equity exposure across our client portfolios.

Looking more closely, the Economic Factors we monitor show an extremely low probability of an imminent global recession with solid global growth expectations for 2021. The majority of global economies are entering the year in recovery mode and are supported by highly accommodative fiscal and monetary policies.

Global Market Fundamentals, and specifically equity valuations, appear reasonable, particularly on a relative basis when compared to bonds. For example, the 10-year U.S. Treasury, yielding all of .92% at year-end, drives capital to areas with historically higher return potential such as stocks.[5] Long-term, corporate earnings growth is a significant component of stock price appreciation, and the expectations for a strong earnings recovery support stocks entering 2021.

Technical Market Factors continued to improve during the back half of the year and remain solid as the trend for global markets appears to have strong upward momentum. We are particularly intrigued by the considerable, outperformance of U.S. Small-Cap and Emerging Markets equities during the fourth quarter. Both asset classes have historically been the early leaders in a global economic recovery.

Our investment outlook for 2021 is constructive given the expectations of a slow and steady return to normalcy and renewed global economic growth. We enter the year in an early-cycle, moderate risk-on posture relative to our diversified global benchmarks with a tactical overweight to the U.S., small-caps, and emerging market equities. We are underweight, traditional fixed income with emphasis on flexible and opportunistic bond strategies. We remain focused on maintaining resilient and diversified portfolios that can withstand a range of economic scenarios. Given the stellar fourth quarter, it would not be unexpected to experience some market volatility entering the new year, but ultimately the greatest risk to a continued economic recovery hinges on a successful vaccine rollout and inoculation. Until the data and evidence change course, we view any near-term volatility as an opportunity to tactically increase equity exposure in portfolios, given that we expect a tailwind for risk assets in the early innings of a global recovery.

Issue Date: January 11, 2021

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

New World Advisors, LLC ("New World") is a Registered Investment Advisor (“RIA”) with the U.S. Securities and Exchange Commission (“SEC”). Advisory services are only offered to clients or prospective clients where New World and its representatives are properly licensed or exempt from licensure.

[1] Morningstar

[2] Morningstar

[3] Morningstar (Russell 2000 Index & MSCI EM Index)

[4] Board of Governors of the Federal Reserve System Dec. 16, 2020

[5] Bloomberg

New beginnings…?