2020 Year
End Market
Commentary

Full steam ahead into 2021! The market that is… As we close out a tumultuous year, it is incredible to see how financial markets behaved in the face of adversity. In a year where personal lives were upheaved and uncertainty seemingly peaked, it is safe to say that positive portfolio returns are a bright spot amongst all the angst. The S&P500 at its low point in March was down -30.7%, and yet the index closed the year up 16.3%. Globally, stocks followed suit, fueled by a late surge from Emerging Markets. The MSCI EM Index gained 19.3% in Q4 alone to close the year just shy of a 16% return. Bond markets (traditionally less volatile than equities) behaved more like equities than true “fixed income” as the Bloomberg Corporate High Yield index plummeted down -19.8% and recovered to close the year up 7.1%. As the economy “re-opened” for business throughout Q2 and Q3, it became evident that the equity market is still very much a forwardlooking instrument. The prevailing trifecta of hope has been a fully open economy, government stimulus, and an effective and safe Covid-19 vaccine. With those three things ahead, the market rallied with almost no reaction to the Fall/Winter reemergence and rapid spread of the virus. Investors appear confident that we are nearing the end of the tunnel and that by Spring 2021, things may be more normal. 2020 has been nothing short of astounding. With all of that in mind, the social and economic bar seems to be set pretty low, and 2021 is hoping to clear it comfortably.

While we certainly did not expect the recovery to be so swift, we did know there would eventually be a recovery of some sort. The stock market today is much different than in years past. The speed at which volatility can present itself and then subdue is remarkable. That kind of aggressive volatility is something we need to be constantly thinking about moving forward as we allocate and invest our client portfolios. There are more types of market participants than ever. Algorithm traders, institutions with strict mandates, buy and hold investors, hedge funds, and the emergence of “Robinhood” traders (young investors mostly trading on momentum instead of fundamentals). Every one of these participants has some impact on the way the market behaves, and in the end, the different approaches tend to smooth out returns. This year more than any in recent memory, will serve as a case study in market timing and why we believe that most timing involves a significant degree of luck. We know that when market valuations are high, we should look to trim profits, and when market valuations are relatively low, we should buy, but the exact timing is typically not worth chasing. What is more impactful is planning ahead. Planning for a range of outcomes in the market and then matching the goals of an investment portfolio with the right allocation to maximize returns relative to risk. Let the market do its job.

So, what can we expect ahead? Let’s start with what we know for sure. Vaccines and stimulus. With several pharmaceutical companies gaining rapid emergency approval from the FDA, the world is ready to begin vaccinating against Covid-19. This has already started to roll out to front line workers and individuals deemed to be high risk. Without speed bumps, this will significantly decrease the actual and perceived risk of Covid-19 to our health and the health of the economy. Naturally, there will be some speed bumps along the way in production, distribution, or reaction. But we trust that anything that slows the progress will be mostly minor and temporary. Next is stimulus. In what will be one of his last significant moves in office, President Trump has signed a new $900 Billion stimulus agreement. There is much debate between political parties as to how that money is being spent, but no matter which way you look at it or which parts of the bill you disagree with, it should be a jolt to a recovering economy. Direct payments to families, individuals, and businesses will be perceived by the market in a positive way, and that is already being reflected in the most recent rally. The counterpoint to this much stimulus is heightened inflation fear. While this is a valid concern, there are rational schools of thought as to why inflation may continue to be muted. Consumer demand and bank reserves both support this. Consumers have not poured the stimulus money into goods and services at the rate anticipated, and banks have continued to hold higher reserves on hand as opposed to lending it out. Both signs that a broad sense of caution is prevailing across the country. In addition to vaccines and stimulus, we also know that a new party is heading to the white house. Presidentelect Joe Biden is leading a democratic administration that is being built out as you read this. Early fears for the market based on increased taxes and increased regulation have been mostly muted for now as stimulus has been at the forefront. What remains uncertain, though, is broad policy fate as a result of the Georgia Senate runoff. We will be watching closely this week as the two close races come to an end. The outcome will affect how aggressively the Biden administration can go after policies such as increasing capital gains taxes and others. We believe that, ultimately, any changes that are made will take time to implement and should minimally affect the market in the coming year. Outside of the white house, we continue to watch the actions and language of the Federal Reserve. The Fed has continued to maintain accommodative language throughout the last two quarters and appears committed to continuing that path into 2021 until the economy is truly stable independent of in fluxed stimulus. A further point to look at is Janet Yellen being nominated as the Secretary of Treasury. In her time as chair of the Federal Reserve, she backed accommodative policy and low-interest rates. As we look at the year ahead, we are enthusiastic and optimistic. Coming off a year of unprecedented lockdowns and uncertainty, it is hard not to be excited about a fresh calendar. While we carry that sentiment into the year for our personal lives, we look to make sure that optimism is not overdone in our investment outlook. 15+% returns for equities is a huge year! During a pandemic, it’s even more impressive. We anticipate a continued “stock-pickers” and “sector-pickers” market ahead, and we believe returns will be positive, but to anticipate a continued run-up as we saw since April through year-end is hard to imagine. While we still believe and recommend continued exposure to the top-performing sectors of 2020 like technology, e-commerce, biotechnology, and cloud computing, we are beginning to diversify into other recovering areas as well with a barbell approach. With a vaccine, we anticipate the “forgotten” sectors of the market to join the recovery later this year. Specifically, the consumer staples sector and the value side of Large, Mid, and Small Cap stocks. We rode growth throughout the back-end of 2020 and are now easing those positions back into “core” to include the value side as well. Earlier in the year, another major aspect of our strategies included additional cash for opportunities and gold exposure to hedge. Moving into 2021, we will continue holding gold as a potential inflation hedge and safe-haven asset, but you will see less and less cash as we are comfortable being fully invested.

On the fixed-income side of our portfolios, we are facing a challenging market. Interest rates are extremely low (great for your new or refinanced mortgage), and with the recovery in bond prices, yields are very low as well. But that is fine. We pride ourselves on the best execution and access to the institutional bond universe. We view fixed income as the conservative slice of your portfolio, with income generation & capital preservation being the main objectives. Our team is methodical and consistent in our approach to bond research, and we are extremely comfortable with every individual name we buy. This does not change in a tight bond market. Our income targets remain consistent, while our yield targets are adjusted to the market levels. The market will always dictate that, and we will not reach too far down the risk spectrum for insignificant yield gains. We remain patient, and when opportunities arise like in March and April of this past year, we again can take advantage of the dislocated market to increase those yields. In addition to traditional fixed income, we will continue to explore other income generation and growth opportunities this year through alternative asset classes like private real estate, distressed debt, and private equity. We look to continually increase our broad offering across these private markets to add additional value and diversification. We look forward to the challenges ahead! Our team anticipates continued growth throughout the year and a market that is higher in six to twelve months than it is today. The combination of a potential recovering economy, stimulus, and vaccination rollouts should continue to raise sentiment and market outlook, and we are excited and ready to navigate it. Our wealth managers look forward to continued year-end reviews and forward-looking planning meetings with you and your families. As always, do not hesitate to reach out with any questions or thoughts. We welcome all conversations and are hopeful that we will be able to see more of you in person again this year!