2020 Year-End Thoughts
After the first quarter of 2020, we wrote in our letter last April that we were living through an incredible period of history. The pandemic weighed heavily on us then, as it still does today. But now in this quarter, we look back at what we’ve endured and lay out our investment outlook for 2021 and beyond.
Market Recap
The past year was tragic and turbulent in many ways. Yet global stocks were up 16.3% in 2020. U.S. stocks did a bit better, with large caps up 18.2% and small caps up 20.0%. Developed international stocks gained almost 10% and emerging-market stocks gained over 15%.
The strong full-year returns mask the incredible volatility and stress investors faced earlier in the year. Stock markets around the world were down 30%–40% for the year by March 23, the year’s low point. From there, stocks skyrocketed into year-end. Amazingly, the major global stock indexes are all up over 65% from their lows; smaller-cap U.S. stocks have nearly doubled since then. During the worst days of March, with pandemic fears rampant and the global economy falling off a cliff, very few predicted this year’s outsized performance.
In fixed-income, core investment-grade bonds gained a strong 7.6% for the year, providing positive returns both during and after the market crisis period. In typical fashion, Treasuries and high-quality corporate bonds benefited from falling rates as investors sought low-risk assets earlier in the year. Interest rates have risen modestly since the positive vaccine news in November, but they are still generally much lower than they were at the start of 2020. Lower-credit-quality sectors of the bond market, like high-yield and floating-rate loans, materially outperformed core bonds during the last three quarters of the year. But they still have some ground to make up from the tremendous selloff suffered in March.
Portfolio Update
In the face of a challenging and chaotic year, The Gardner Group’s portfolios performed well. Although the first quarter was difficult, our decision in mid-March to add an increment back to U.S. stocks added value, as stocks measured by the S&P 500 are up roughly 50% from that time. Over the course of the year, we also reduced our tactical foreign stock position and shifted more into emerging-market stocks where valuations were more attractive and we have higher conviction. Since then, emerging-market stocks have outperformed both European and U.S. stocks, boosting portfolio returns. There are reasons to believe prior years’ macro and market headwinds may be turning into tailwinds for our portfolio positioning.
Looking Ahead to 2021 & Beyond
Even as we remain in a challenging winter, there are several reasons to be optimistic for society, the economy, and markets. The likelihood of widespread vaccine distribution supports the case for an economic recovery beginning in the second and third quarters. Central bank monetary policy is almost certain to remain very accommodative for at least the next year or two. And fiscal policy is unlikely to be restrictive and could be stimulative, depending on political outcomes. This macro backdrop should be supportive of equities and other financial risk assets, at least for 2021.
U.S. stocks continue to have high absolute valuations, but they don’t look expensive relative to extremely low bond yields. Still, in our view, non-U.S. stocks, emerging-market stocks in particular, are more attractively valued and have much higher five-year expected returns. And if the U.S. dollar, which tends to move opposite global growth, continues its recent decline amid a worldwide economic recovery, U.S. investors in non-U.S. stocks will earn an additional currency return. We remain underweight to U.S. stocks and overweight to emerging-market stocks for these reasons. From a portfolio performance perspective, we’d be very pleased to see our formerly contrarian views on non-U.S. stocks over U.S. stocks become the consensus.
Risks to Our Outlook
As always, The Gardner Group must assess the risks associated for clients’ financial plans. Unexpected shocks can happen at any time, whether a jump in inflation, domestic political dysfunction, geopolitical conflict, or trade disputes. Financial market history teaches us to expect the unexpected and expect to be surprised. Over the next few months, there is a real risk of a sharp economic slowdown from pandemic-induced lockdowns and, potentially, inadequate additional fiscal relief for households, small businesses, and state and local government budgets. But given the positive macro and investment backdrop, we would likely view any financial market drawdowns as temporary.
Looking out longer term, over our five-year tactical horizon, the big risks we are watching are the specter of inflation and China. Inflation is a lower concern at this point, but we have several asset classes and strategies in our portfolios that should do well in an inflationary environment. Turning to China, we could see a pullback in stocks there, especially as China reins in excesses and reduces stimulus. We also expect trade and tech conflicts to continue. But longer term, we remain bullish on China and emerging-market stocks in general.
We believe our portfolios are well positioned for the base-case recovery from the global pandemic, but our positioning always incorporates a wide range of potentialities. Should a less sanguine outcome occur, we have investments in the portfolio that can offer downside protection. And we are prepared to prudently, and opportunistically, respond as events unfold as we did in 2020.
Partnering with You
In addition to financial market gains, 2020 offered numerous wealth planning opportunities. At the start of the year, the SECURE ACT resulted in new retirement and estate planning opportunities. As the pandemic broke and Congress acted, we partnered with clients to evaluate and implement relevant provisions of the CARES Act around tax planning, charitable giving, and small business support. And with the potential for tax law changes in 2021, at year-end we worked with clients on the timing of income, deductions, and estate transfers.
After partnering with you during such a tumultuous year, The Gardner Group appreciates more than ever the trust clients place in us to support your full financial picture. As we welcome a hopefully brighter 2021, we wish you and yours a healthier, happier, and prosperous New Year.