View/Download PDF version of Q4 Commentary (or read text below)

Equities
In an eventful Q4, the stock market performed very well, as the S&P 500, Nasdaq 100, and Dow Jones Industrial Average were up 12.15%, 13.09%, and 10.73%, respectively. News was largely supportive of stocks this quarter, as a clear Presidential winner was announced, multiple vaccines entered distribution and a second fiscal relief bill was passed. On a full-year basis, the Nasdaq 100, which is populated mostly by technology companies, delivered a nearly 49% return, its best year since 2009, while the bellwether S&P 500 Index gained 18.4% and the “seasoned economy” Dow increased almost 10%. International and Emerging Market stocks also had strongly positive performance this year.

2020 was astonishing in that both the stock market and the economy (as measured by GDP) experienced their most rapid declines and corresponding recoveries in history. In response to lockdowns – which portended a nearly totally dormant nation – the Federal Reserve acted swiftly and vociferously by lowering interest rates and buying treasury bonds, thereby injecting much needed liquidity into a frightened financial market. Also buoyed by a large fiscal stimulus bill in March, the markets recovered as it became clear that COVID’s negative economic impacts would be mostly transient.

Fixed Income
Interest rates collapsed to nearly zero in 2020 as a result of central bank action and investor flight to safe haven assets. Indeed, the 10-year treasury bond touched a historical nadir of 0.52% on August 4, down from 1.88% at the start of 2020. The 10-year treasury – a good proxy for the holistic interest rate environment – spent much of the year close to 0.70% and sits today just above 0.90%. Bond prices rise when interest rates fall, so investors experienced capital gains in their fixed income holdings. However, likely the most important impact that the rate decline had was on stocks, as investors passed on paltry bond yields in favor of equity investments.

Outlook
The economic fundamentals heading into 2021 are firmly optimistic: several vaccines are entering distribution, a second fiscal bill will have positive impacts, and yet, interest rates remain in the basement (which is both stimulative to the real economy and to stocks). The question, however, is to what extent such fundamentals are already reflected in asset prices after such a robust market recovery beginning on March 23. Another salient question on the mind of investors is to what degree trends which strengthened during the pandemic – such as e-commerce, food delivery and teleconferencing – will persist, or give way to “the old way” of doing things. We expect healthy economic performance as the American population gets inoculated through the year and, as always, will be following the markets closely and adjusting our views as fit.

by William Henderson, Vice President / Head of Investments
The first week of trading in 2021 continued the market rally we saw for a good portion of 2020. For the week, the Dow Jones Industrial Average returned +1.61%, the S&P 500 Index +1.83% and the NASDAQ + 2.43%. Technology and “green” stocks continued to do very well as the realization that a Biden administration bolstered by a Democrat-controlled U.S. Congress will push green energy, improved technology, and eventually infrastructure. 

Last week saw events in Washington DC that sadly shocked the world. Protesters stormed the U.S. Capitol building and temporarily shut down the activities of Congress. Perhaps Americans wrongly assumed that protests, riots, and general unrest was over with the U.S. Presidential Election finally behind us, but this was not the case. Political uncertainly continues to pose risks to the markets and is difficult to predict and quantify. For example, as noted above, the technology sector is poised to grow much stronger than the overall economy, but we are seeing politics impact social media companies like Twitter, Facebook and Parler as some sites banned President Trump from use. What will the outcome and impact be on those companies is yet to be played out, but it creates, and unknown risk and markets hate unknown risks. Arguments will abound about whether social media companies are broadcast companies, news outlets, utilities or just fun pastimes and what, if any, regulations should be imposed on their actions. The argument that social media companies are utilities is specious at best, as you can live without Twitter but not without water, electricity or even a phone. But our U.S. Congress has reign to do many things, all of which create risks and unknowns. 

The U.S. Federal Reserve continues to be the one core bedrock of the economic recovery with a firm position by Fed Chair Jerome Powell to keep interest rates low for as long as necessary. The Fed Funds Rate, the interest rate that banks charge other banks for lending excess cash, remains near zero, while the 10-year U.S. Treasury Note moved a few basis points higher last week and now stands at 1.11%. Finally, there is steepness in the yield curve. Banks make money when the yield curve is steep – they borrow low and lend high. This week, we will see the first of the large banks reporting fourth quarter earnings – JP Morgan Chase, PNC Bank and Wells Fargo, among others, are all slated to report by week’s end.  

Headwinds exist today from the COVID-19 pandemic and serious political unrest. Tailwinds also exist with investments in technology, green energy and infrastructure and a willing Fed to keep the pump primed for economic expansion. Lastly, a pent-up consumer is sitting on the sidelines waiting for a vaccine and an “all clear” sign for leisure activities to open up again.