moving forward

moving forward

4Q20 Market Overview

In hindsight, 2020 was a challenging and interesting year to say the least. Unlike other sharp and painful equity corrections that question financial security, Covid-19 instilled an additional layer of personal health concerns that compounded the psychological impact of the market movements.

Our rebalancing process took advantage of the emotional distress in oversold equities that took the Dow down 37% to its March low of 18,591 before reversing course. Fortunately, almost all our clients were willing to sell bonds and buy stocks to participate in the stunning V shaped rebound that elevated equity markets to record highs by year-end.

Moving forward, attention will turn to the alarming Covid-19 cases and how quickly the vaccine can be produced and delivered on a global scale leading to herd immunity. Regardless of the market direction, our disciplined process will utilize market changes to shift towards our target allocations in the most tax-efficient manner possible while maintaining your desired risk level and fulfilling your cash flow requirements.

Planning Note: Multi-year income and estate tax planning will become increasingly important once President-Elect Biden takes office with support of a democratic controlled Congress.

U.S. Equity Markets

U.S. equity markets added to the impressive recovery from the March lows with the Russell 3000 advancing 14.7% during the quarter to finish the year with an exceptional 20.9% annual return. In a quarter plagued by U.S. election noise, positive vaccine developments and a $900 billion stimulus package overshadowed the election and helped boost equity valuations to an all-time high by year-end. These upbeat developments coupled with Joe Biden’s announcement that he plans to nominate Janet Yellen as the next Treasury Secretary align with current accommodative monetary policies. Although investors are focused on further gains, we need to be mindful that actual results will be heavily dependent on a quick and successful vaccine rollout. Positive adoption of the vaccine will lessen concerns of a further economic slowdown and could lead to a reduction in the unemployment rate which peaked at 14.7% in April before ending the year at 6.7%.

International Equity Markets

International developed equity markets finished the quarter with an impressive 16.1% gain for the MSCI EAFE which led to a positive 7.8% annual return. Encouraging vaccine news along with an historic €1.8 trillion budget package helped lift the struggling eurozone. The European Union (EU) agreed to a long overdue Brexit trade deal with the UK at the end of the year which will help the tax-free flow of good across EU borders, Japan also benefited from optimistic vaccine news and U.S. presidential election result. Focus will now turn to their October general election and corporate earnings recovery. The MSCI emerging markets outpaced the developed markets with a robust 19.7% gain and attractive 18.3% annual return. China was the first to tame the virus and seems well positioned along with South Korea and Taiwan to continue their accelerated recovery trajectory. Both developed and undeveloped international markets look more attractive from a valuation perspective compared to U.S. markets if a well-coordinated vaccine rollout help produce international economic growth.

Fixed Income Markets

Safety-minded investors experienced slightly positive results as the closely watched Barclays Aggregate rose 0.67% during the quarter and impressive 7.5% for the full year. Strong demand of US Treasuries continued to hold interest rate yields anchored near history lows. The 10-year Treasury yield edged modestly higher during the quarter from 0.69% on September 30 to 0.93% on December 31. Given the yield increase, it is not surprising that longer dated US Government securities retreated a bit more. The Barclays US Government Long posted a 2.95% quarter loss, Intermediate 0.22% loss and Short 0.05% gain. In the international fixed-income arena, the JPM Non-US Unhedged gained a solid 4.6%. The Barclays Municipal finished the quarter with a gain of 1.8% as tax-sensitive investors celebrated the benefits of the year-end stimulus package.

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