The Fourth Quarter Started Rough But Ended Smooth
That actually mirrors the story for the entire 2020 year! In the first quarter of 2020, March in particular, equity markets started rough. We experienced the quickest, shortest Bear Market in history, hand in hand with the quickest, shortest economic recession in history, thanks to COVID-19 and the world’s response. After the recovery rally in April and May, the rest of the year was relatively smooth sailing. Even a highly contested election didn’t alter the market’s course. Equity markets spent August, September, and October ricocheting up and down inside a 10% trading range. The first week of November, (yes, election week and before the COVID vaccine news) equity markets rallied higher to breakout to new all-time highs and smoothly advanced higher through the end of the year. The S&P 500 Index gained +12.15% in the fourth quarter and ended the year with a gain of +18.40%. There were huge advances in mid cap and small cap equities in the quarter. The S&P MidCap 400 Index gained +24.37% and finished with a YTD return of +13.66%. The S&P SmallCap 600 Index gained +31.31% in the third quarter, finishing 2020 with a gain of +11.29%. In short, an unbelievable year finished with a remarkable quarter.
Every Primary Industrial Sector Experienced A Positive Fourth Quarter, Even Energy
In fact, energy was the top performing sector of the fourth quarter. The S&P Composite 1500 Energy Sector was up +28.46% in the quarter, but still finished the year in negative territory, down -33.81%. Another top performer in the fourth quarter was another beaten down sector, financials. The S&P Composite 1500 Financials Sector gained +24.31% in the quarter, finishing down -1.91% YTD. Quarterly returns in other S&P Composite 1500 Sector Indexes were all impressive. The Consumer Discretionary Index was up +9.68%, the Consumer Staples Index was up +6.69%, the Health Care Index was up +8.91%, the Industrials Index was up +16.85%, and the Information Technology Index was up +12.89%. The only sector to finish 2020 in negative territory besides energy was real estate, down -5.29%, even after rising +7.72% in the fourth quarter.
International Equities Were Quick To Follow U.S. Markets
The MSCI Europe Index jumped up +15.61% in the fourth quarter, while the MSCI Emerging Markets Index rose +19.70%, and the combined MSCI EAFE Index gained 16.05%. These results pushed all three indexes into positive territory for the year. The MSCI Europe Index finished 2020 up +7.82%. The MSCI Emerging Markets Index closed 2020 up +18.31%, and the MSCI EAFE Index closed +7.82%. International markets, in addition to being positively impacted by news of the COVID vaccines, benefited from the continued slide of the U.S. Dollar versus foreign currencies in the fourth quarter.
High Yield Bonds Had An Excellent Quarter While Investment Grade Bonds Were Steady
The Bloomberg Barclays U.S. Corporate High Yield Bond Index was up +6.45% in the fourth quarter and ended the up up +7.11%. The Bloomberg Barclays U.S. Aggregate Bond Index rose +0.67% in the quarter and finished the year up +7.51%. The Bloomberg Barclays Municipal Bond Index had another good quarter, gaining +1.82%, to close the year with a gain of +5.21%. Short term interest rates, which are expected to remain consistently low for the foreseeable future under the Federal Reserve’s guidance, continue to pressure returns for the Bloomberg Barclays 1-3 Month T-Bill Index. It gained +0.02% for the fourth quarter and was up +0.54% YTD.
The Elections Are Behind Us And There’s A Light At The End Of The Tunnel For COVID-19
This provides financial markets an opportunity to function minus two primary distractions. Certainly there will be additional situations to consider in the future, but the resiliency of the U.S. financial marketplace has been tested in fire. It remains the strongest reflection of the strongest economy in the world.
Edward D. Foy, Manager, SELECTOR® Money Management
© 2021 Edward D. Foy. Sources: Bloomberg, Standard and Poor’s, Morningstar, StockCharts.