2020 was a remarkable year in a number of ways, including for financial markets, which established several new historical records. The crash in stock prices as the Coronavirus pandemic unfolded in February and March is well remembered, as is the blistering pace of recovery in market prices in the last nine months of the year. US stock prices received much of the attention, for their 35% decline from all-time highs (at a record pace), their complete recovery by the middle of August, and for setting several new all-time highs in the final weeks of the year.
Initially, the recovery in US small cap stocks lagged behind that of large companies, but the Russell 2000 index of US small companies eventually caught up and ultimately outperformed the S&P 500 index of large US companies by 1.6% for the full year (+20.0% to +18.4%). So far, small companies in the US have continued to outperform in the new year, as well.
The rebound in equity prices was most pronounced in US large growth stocks, as companies such as Amazon, Apple, Netflix, Facebook, and Google found themselves the beneficiaries of a new “virtual economy,” defined by online shopping, binge-watching entertainment, and generally staying home. Growth companies outperformed value companies by a stunning 35.7% last year, as defined by the Russell 1000 Growth (+38.5%) and Value (+2.8%) indices. Valuation differentials between growth and value companies are now at all-time historical extremes.
US stock market performance in 2020 was rather surprising for many investors when contrasted with the grim jobs market, in which 70 million Americans filed for some form of unemployment benefits last year. The total number of job losses for 2020 now stands at nearly 10 million. There is no doubt that the dramatic rebound in equity markets (and economic growth) in the second half of 2020 was due in large part to a highly successful, two-pronged, coordinated campaign of (1) massive federal relief spending, and (2) extraordinary accommodation by global central banks, especially in the United States.
Emerging markets also performed well in 2020, matching the performance of the S&P 500 almost exactly (+18.3%) and far outperforming foreign developed markets, which returned 7.8% last year. Lower interest rates and a decline in the US dollar (-6.7%) was especially helpful to emerging market economies, which tend to borrow in US dollar-denominated debt. Ten days into the new year, emerging markets are now trading at all-time highs.
Despite the fact that inflation remained low throughout 2020, inflation hedges also did well last year, with Treasury Inflation-Protected Securities up 11%, gold up 25%, and silver up 47.4%.
Fixed Income investments had a good year, as interest rates plunged to all-time record lows by the summer, lifting bond prices across the board. The US Federal Reserve re-started its asset purchase program (“quantitative easing”) on March 23 and even expanded its purchases beyond US Treasury and Agency bonds to include US corporate debt instruments, as well. Overall, investment grade bonds returned +7.5% in 2020.
While most asset classes had positive returns in 2020, a notable underperformer was the commodities market, crude oil in particular. As the global economy ground to a halt and nearly all non-essential travel ceased in the spring, oil futures prices briefly went negative as the world ran out of storage space. Oil did rebound sharply but still fell 20.6% last year, and it was the worst performer in the Bloomberg Commodity Index, which returned -3.1% in 2020.
All in all, investors holding a well-designed, diversified portfolio should have experienced a pretty solid year in 2020, especially if they were able to sleep through the volatility! But the final year-end result would have been nearly unthinkable at the end of March, at the peak of the drawdown. This phenomenon is another reminder of the nature of volatile financial markets – short-term gyrations are not predictable, and attempting to “time” the markets is likely to be an exercise in frustration. Instead, long-term investors are generally rewarded if they remain patient and committed to a disciplined financial plan.