MARKET COMMENTARY: Q4 2020
At the end of the fourth quarter, it is customary to look back to ascertain the various events and economic inputs that might help us understand and contextualize the ebb and flow of markets for both the quarter and the year. 2020, however, is a year unlike any most of us have endured. As market participants, we experienced both precipitous drops and remarkable gains, with global markets ending Q4 2020 on a historically high note, despite the unresolved health and economic impacts of the COVID-19 pandemic, as well as political upheaval from the U.S election and U.K. Brexit.
In 2019 global equities finished the year on an extraordinary run, powering the S&P 500, Dow Jones Industrial Average, and NASDAQ Composite to historic records, with respective returns of 31.49%, 25.34% and 36.69% for the year. While the MSCI EAFE and MSCI Emerging Markets indexes kept pace with positive returns of 22.66% and 18.90% for the year.1
Markets continued that upward momentum through early February of 2020, but the health crisis of COVID-19 quickly morphed into an economic crisis, and markets collapsed. The S&P 500 suffered its quickest fall into a bear market on record, taking just 16 days to slump from all‐time highs and bring an end to an 11‐year bull market.2
Volatility reached unprecedented levels, with the VIX closing at a record high of 82.69 on March 16th resulting in U.S. equities recording double‐digit daily swings.3
At quarter end, after dropping -33.47% from February 19th to March 23rd, the S&P 500 finished the quarter with a decline of ‐19.60%, the Dow Jones Industrial Average was down ‐22.73%, and the NASDAQ Composite finished down ‐13.95%. International Developed and Emerging Markets suffered a similar fate, with the MSCI EAFE and MSCI Emerging Markets indexes posting negative returns of ‐22.72% and ‐23.57%.4
In the second quarter, optimism fueled by monetary and fiscal stimulus helped global equities stage a remarkable recovery. Big technology stocks did particularly well, and by quarter end had helped power a strong reversal across markets. The S&P 500 finished up +20.54%, the Dow Jones Industrial Average was up 18.51%, while the tech-heavy NASDAQ Composite finished the quarter up an astounding +30.95%. International Developed and Emerging Markets participated in a similar fashion, albeit to a lesser degree, with the MSCI EAFE and MSCI Emerging Markets indexes posting positive returns for the quarter of +14.88% and +18.08%.5
Over the course of the third quarter, optimism gave way to disappointment as a second wave
of COVID-19 arose, further fiscal stimulus failed to appear, and the economic recovery waned. However, despite a slump in September, US markets managed to end the quarter in positive territory. For the quarter the S&P 500 finished up +8.93%, the Dow Jones Industrial Average was up +8.22%, while the NASDAQ Composite finished the quarter up +11.24%. International Developed and Emerging Markets participated, with the MSCI EAFE and MSCI Emerging Markets indexes posting positive returns for the quarter of +4.88% and +9.70%.6
The fourth quarter saw a broad rally across assets driven by positive developments associated with breakthroughs on vaccines for COVID-19, and the much-awaited fiscal stimulus from Washington. The S&P 500 finished the quarter up 12.15%, and the year up 18.40%. The Dow Jones Industrial Average finished up 10.73% for the quarter, and up 9.72% for the year. The Nasdaq Composite, dominated by tech giants such as Apple, Microsoft, Alphabet and Amazon, gained 15.63% for the quarter, and more than 44% for the year. International markets also ended the year strongly, the MSCI EAFE and MSCI Emerging Markets indexes kept pace with positive returns of 16.05% and 19.70% for the quarter, and 7.82% and 18.31% for the year.7
Exposure to risk factors resulted in excess returns in general, though consistent with the topsy- turvy nature of markets, various factor exposures contributed at various times, once again demonstrating the importance of overall factor diversification. Over the course of the year, Value, Size, Momentum, Quality and Minimum Volatility were both rewarded, and lagged. Recent years have seen a particularly strong trend against the original “Fama-French” factors of Value, and Size relative to large-growth. In the fourth quarter of 2020, as well as during the strongest phase of the Q2 recovery, this trend started to show signs of reverting. For Q4, Value and Size outperformed across all markets. For the year overall, Momentum and Quality outperformed across all markets, with Size outperforming across International Developed and Emerging Markets, while Value and Minimum Volatility lagged across all markets.8
2020 serves as a reminder that the world can be an unpredictable and chaotic place, dramatically impacting both economics and sentiment. Supply, demand, consumption, despair, tragedy, resilience, and hope all help tell the story of the year. The arc of human history shows us that we learn to adjust, adapt, and overcome. Markets are a meeting place where we can observe that ongoing story unfold and participate. We have learned that a market participant can have meaningful success by remaining committed to a disciplined and diversified long-term investing approach. In most years, that mantra may seem a platitude. In years like 2020, it can serve as a guardrail keeping you from careening off the path.
1 Morningstar Direct, as of Jan 2, 2020
2 Georgiadis, P. “How coronavirus tore through global markets in the first quarter”, Financial Times, Mar 31, 2020 3 Chicago Board Options Exchange
4 Morningstar Direct, as of Apr 1, 2020
5 Morningstar Direct, as of July 1, 2020
6 Morningstar Direct, as of Oct 1, 2020
7 Morningstar Direct, as of Jan 1, 2021 8 Morningstar Direct, as of Jan 1, 2021
MARKET COMMENTARY: Q4 2020 DISCLOSURE
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S&P 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization.
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