Fourth Quarter 2020
Happy New Year! Now that we have finally turned the page on 2020, I hope you and your family are safe and healthy heading into 2021. Last year was difficult on many fronts: virtual learning for children, limited interaction with family and friends, working remotely, new spikes in COVID-19 cases globally, a contested election, and Brexit negotiations. November marked the development of not one, but two vaccines promoting approximately 94% effectiveness. While there are many unknowns about logistics and acceptance rates, the start to completion of this vaccine is just short of a miracle. The ability of current technology to produce a viable solution to a pandemic gives us hope against current and future diseases.
During the fourth quarter, Joe Biden won the U.S. election and will assume the presidency in January. Markets have accepted the Biden win with little volatility, despite the challenges to the election process. The Democrats have flipped the Senate, which could increase Joe Biden’s ability to pass more legislation than previously expected. Given the recent confrontation at the U.S. Capitol, House Democrats have voted to impeach President Trump. The Senate will move to a trial and will be conducted after the January 20 inauguration.
The U.S. and emerging equity markets continued their strong returns in the fourth quarter, with vaccine announcements pushing a rotation into U.S. value stocks and higher risk emerging market countries. Additionally, during the quarter, riskier high yield fixed income posted mid-single digit gains versus the global aggregate of low-single digit returns. As the quarter progressed and as we moved past Thanksgiving, we started to see a second surge of COVID-19 cases. The markets continued to look past the surge and the risk of another shutdown. With the vaccine development and approval in the U.S. and globally, the markets were forecasting a start to return to normalcy in 2021. The rollout of the vaccine to frontline workers in December continued to fuel markets higher. However, as we moved past the December holidays and looked toward the New Year, the U.S. and global populations are currently experiencing new daily records of COVID-19 cases and increased hospital utilization rates. Slower than expected vaccine rollout coupled with the certification of the U.S. Electoral College results, the markets have started to pause in its upward trajectory.
The U.S. Federal Reserve remains supportive monetarily, targeting near term rates close to zero. During the quarter, the yield curve has become steeper with longer term rates slowly going higher. Increasing inflation expectations could be the cause of the rise in long-term rates. The Federal Reserve has indicated its willingness to allow for inflation above targeted rate of 2% for a period of time. This has benefitted bank stocks as a flat yield curve had been shrinking their net interest margins.
As we look back at the last quarter, in the face of the rising COVID-19 cases there were two stocks held in our focus list that performed well: Disney and Alphabet (previously Google) both posted strong double digit returns during the fourth quarter. Disney benefitted from stronger than expected subscribers to its streaming video service (Disney+) and vaccine development may lead to earlier full opening of global amusement parks. Alphabet had strong earnings results from rebounding ad revenue, strong YouTube results, and continued Cloud segment growth. Our holdings in Fidelity Total Emerging Markets fund performed well during the quarter, attributable to its exposure to emerging Asian countries.
I mentioned it before at the top of the letter but want to reiterate the unprecedented speed and number of vaccines developed. The speed, in which we developed a vaccine, hopefully will help us better manage future viruses and other diseases. The acceleration and enhancement of existing technologies for telemedicine and online learning could help reach the underserved part of the population. The ability to work from home for employees with families is showing early signs of improvement in their quality of life.
In 2020, the S&P 500 returned 18.39%, MSCI EAFE returned 8.39%, the MSCI Emerging Markets returned 18.5%, and the Bloomberg Barclays US Aggregate Bond Index returned 7.51%. The resilience of the markets in 2020 in the face of the many challenges during the year far surpassed our expectations. The velocity of the rebound was especially surprising during the year. It is nothing short of a miracle that the markets have overcome a multitude of obstacles mainly stemming from two areas, COVID-19 and a severely contested U.S. election. While there have been numerous COVID-19 issues, the markets have astonishingly overlooked a second surge of cases and the emerging of new COVID-19 strains. The downturn in the U.S. markets earlier in 2020, equated to 17 trading days from peak to trough. The last recession took approximately 250 trading days from peak to trough. The velocity of market correction made it difficult to hold conviction of a market rebound.
Chief Investment Officer
Chief Investment Officer
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