Week of January 4, 2021
What a year for stock investors in 2020! The year began with a solid performing early January, but by the end of the month, we began to hear the word, “coronavirus.” Fear of a wide-spread pandemic and ensuing economic collapse, drove the U.S. equity markets from near all-time high levels on February 19 to being down more than 30% by March 23. In what became the fastest market recovery in decades, all three major stock indices posted record highs by year end. The Dow Jones Industrial Average, the laggard of the three, gained 7.3% for the calendar year 2020. The S&P 500, an index also comprised of large cap U.S. stocks, posted a total return (includes dividends) gain of 18.4%. The tech-heavy NASDAQ was the clear winner, gaining 43.6%, as the largest tech names benefited from the stay-at-home economy created by the coronavirus lockdown restrictions.
2020 was year when the investor was rewarded for taking equity risk, at times having to turn a blind eye and a deaf ear to the constant news of the spread of COVID and the collapsing U.S. and global economies. The market’s bounce off the March 23 lows formed what came to be called a “K-shaped” recovery.
Investors begin 2021 on a rather optimistic note, notwithstanding the continued rise in reported COVID infections. In fact, yesterday, January 3, saw another record high in COVID-related hospitalizations. Investor hopes for a continued rally in 2021 are based on two “pillars.” First, that the distribution of vaccines from Pfizer and soon, Moderna, will being to bend the curve of rising infections and promote herd immunity against the virus. Second, that the Federal Reserve will continue to promote and provide a growth environment for the U.S. economy enabling a return to pre-pandemic levels.
The U.S. equity markets are a forward-looking economic indicator. If the market perceives that the distribution of vaccines and an accommodating Fed will revive the economy and get the U.S. economic engine running again – increasing GDP and decreasing unemployment – 2021 may provide solid returns. We are keenly aware, however, that market advances are rarely a straight line, and risks exist.
