When 2020 began, there was optimism for the new year and equity markets were setting the stage for record highs due to strong economic fundamentals. No one could have foreseen the events that would take place during this extraordinary year, nor could they have predicted the markets would end even higher. The global pandemic has changed our lives in many ways and forced us to adapt to a “new normal” by embracing technology and adjusting our social skills. For the small business owner, the year was likely challenging and disruptive as rising COVID-19 cases led to not one, but two rounds of shutdowns. However, many large corporations were able to shift their business models, and in some cases, prosper during these difficult times. This was primarily due to the fact that there was record U.S. corporate debt issuance in 2020 which overwhelming helped larger companies rather than small companies.
With hopes of a vaccine on the horizon and expectations of pent-up consumer demand, the forward-looking equity markets rallied during the fourth quarter with the S&P 500 posting gains of 12.2%, largely led by cyclical and technology stocks. Over the course of the year, we saw the S&P 500 fall by 34% between February 19th and March 23rd only to rebound 68% by the end of the year, resulting in an annual return of 18.4%. Small- and mid-cap companies, as measured by the Russell 2000 Index and Russell Midcap Index, began to narrow the gap with large caps as is typical in the early stages of recovery, returning 31.4% and 19.9%, respectively.
For the first time in many years, value stocks outperformed growth stocks during the quarter. The Russell 1000 Value Index returned 16.3%, while the Russell 1000 Growth Index returned 11.4%. All S&P 500 sectors were in positive territory during the quarter, with energy and financials leading the way, returning 27.8% and 23.2%, respectively.
Foreign equity markets also posted strong positive returns during the quarter with the Developed and Emerging Markets indexes up 17.0% and 19.7%, respectively.
Bond yields rose steadily during the quarter with the 10 year Treasury yield increasing from 0.68% to 0.93%. Fixed income returns were modest during the quarter with the Barclays Aggregate Bond Index up 0.67%.
US economic growth in the fourth quarter slowed abruptly as COVID-19 cases and hospitalizations reached an all-time high in some areas causing shutdowns across the country. Even though the duration of the 2020 recession was only two months, compared to 18 months during the Global Financial Crisis, the economy has only recovered about 65% of lost output from the first two quarters of the year.
Total nonfarm payrolls declined by 140,000 in the month of December, leaving the unemployment rate unchanged at 6.7%, which equates to 10.7 million workers seeking employment. The unchanged employment figures reflects a recent increase in COVID-19 cases that resulted in lockdown efforts being reinstated across the country to contain the pandemic.
During the fourth quarter the headline inflation measured by the Consumer Price Index (CPI-U) grew at 1.4%, no change from the previous quarter. An 8.4% increase in the gasoline index in the month of December was a major contributor this quarter along with a continued rise in food prices. Core CPI grew at an annual seasonally-adjusted rate of 1.6%, which excludes food and energy, and was largely driven by an increase in the Used Cars and Trucks index up 10% while Apparel and Transportation Services indexes have declined over the past 12 months.