Quarterly Commentary

4Q 2020

2020 will be remembered for the pain and suffering inflicted by the Coronavirus. The misery continues as we hope and expect that 2021 will be recalled as a year of recovery that will unfold in the months to come.

By March it became clear that the virus would spread everywhere and impact everyone, and the health crisis quickly touched off economic and financial markets meltdowns. Many stocks fell 50% or more in a matter of a few weeks. Then, faster than most could believe, a stock market rebound emerged that by the end of the year had lifted the indexes and averages well past their previous highs. Many investors and market commentators found it challenging to reconcile the health of the financial markets with the ongoing suffering.

It bears repeating – market behavior reflects a collective view of the future. The market’s outlook may not be the same as your view or my view. And the future is not today, it is several or many months down the road. One of the hardest things for humans to do is to remain optimistic when current conditions seem especially grim. It is counterintuitive to the point of seeming insensitive. Some investors understandably experience feelings of mistrust or anger when markets appear to be ignoring human misery.

In last April’s commentary, we offered several reasons for remaining invested in stocks, among them the decisive and massive government spending and lending in support of American families and the American economy. It turned out that the stimulus dwarfed all previous rescue efforts. A recent NYT article quantified the impact by examining the period from March to November. Total personal income rose by $1 trillion – those checks, extended unemployment benefits and the Paycheck Protection Program exceeded the decline in total wages by that much. Total personal spending fell by $500 billion as higher expenditures related to being at home were more than offset by the lack of in-restaurant dining and travel. All told, Americans saved $1.5 trillion, compared to $570 billion over those same eight months in 2019. As the Times article put it, “Even as millions of individuals faced great financial hardship, Americans in the aggregate were building savings at a startling rate.”

The stock recovery occurred in stages – it was initially driven by money pouring into the large tech stocks. Paraphrasing what we observed in July, buying focused on a handful of tech names was responsible for pushing the market higher. Investors were scared. They flocked to what they viewed as “pandemic-proof” companies with outsized earnings growth, balance sheet strength, and the potential to emerge from the crisis even more powerful. Had they been more confident about an enduring recovery, they would have been buying cyclical stocks, deep value and reopening plays, not leaving them for dead.

In October we wrote, “If one believes, as we do, that better times are ahead, it makes sense to be looking at sectors that have lagged and would be positively exposed to a continued recovery.” It turned out that investors were waiting until the election to buy more stocks. Did the actual results matter? Most of the election week’s 7% gain was posted in the first half of the week, before it was clear who had won.

The broader market’s performance since then is remarkable. Simply put, economically sensitive stocks began to catch up to the big tech favorites. The realization that vaccines were on their way and that economic collapse had been averted finally extended the rebound to sectors like small caps and financials that were previously overlooked.

Looking ahead

The year-end rally is continuing into 2021 – holding up through the riot at the Capitol last week demonstrates impressive market resilience. Yet there are signs of froth that remind us that what has been dubbed “the everything rally” will not last forever.

Reasons for continued optimism

  • More support is on the way. The recently enacted relief package is expected to pump $900 billion into the US economy over the next few months.
  • Pent-up demand for virus-depressed services should drive consumer spending and economic growth as the year progresses.
  • The Fed has promised to keep short-term rates low until inflation settles in at (not just touches) 2% and unemployment returns to pre-pandemic levels. Short rates usually rise along with economic growth. Maintaining them at an unusually low level could encourage more consumer and business spending and provide a further boost to asset prices.

Reasons for caution

  • 2021 starts with high expectations and lofty valuations in certain stock market sectors – tech and renewable energy among them. The bellwether tech leaders are vulnerable to continuing regulatory scrutiny and while we expect a policy tailwind for renewable energy, change will take time.
  • Although the Biden administration will likely tone down the rhetoric, the US and China are expected to continue to jockey for geopolitical dominance leading to bouts of volatility.
  • Higher inflation and taxes (corporate especially) are possible in the coming years and will be watched closely by investors.

Higher long-term interest rates could prove to be the biggest risk and the biggest opportunity for stocks in 2021. While we are not by any means counting out Tech or any specific sector in 2021, it is very possible that new market leadership is emerging. We believe most investors are still not positioned for such a change.

Many individuals and businesses are still suffering. We hope the recovery will expand to include more of those left behind. Patience and perspective were essential in 2020 – we expect they will help investors and the nation through the challenges that lie ahead.  



Footnote – Neil Irwin and Weiyi Cai, Why the Markets Boomed in a Year of Abject Human Misery,

The New York Times, January 2, 2021