December Market Overview
December closed out a year we’d all like to forget; although with a continued rally in stocks, most major indexes were positive for the year.
We believe that rally was driven largely by continued optimism around prospects for an economic rebound as distribution of the COVID-19 vaccine got underway, even in spite of the rampant increase in COVID cases throughout much of the world. Beyond that, investors were pleased with developments in Congress that ultimately allowed the passage of another significant $900B stimulus package, as well as a formal Brexit deal that has been four years in the making.
Many economic datapoints also improved, continuing the positive trajectory we’ve continued to see since reaching the depths of the lockdowns. For instance, the ISM manufacturing index climbed to 60.7 in December, up from a low of 41.5 in April. Meanwhile, jobs have continued to return, and the unemployment rate dipped to 6.7% in November and remained there through December – down from 14.7% in April. Over the coming weeks and months, we anticipate even more people will return to work as the vaccine rolls out and the services economy rebounds.
Also worth highlighting is the strength of the U.S. consumer, which, overall, has remained remarkably resilient. We point to the U.S. personal savings rate, which came in at 12.9% of disposable personal income in November (the most recent datapoint). Though this has declined considerably from the high of 33.7% in April, it remains well above what has been typical over the last 20 years. We view this very positively, as it suggests that consumers are broadly healthy with money to spend when they feel more comfortable getting out again.
On a related note, consumer confidence finished the year at 88.6. While this was down somewhat from prior readings in September through November, this is likely in response to the significant spikes in COVID cases throughout the country, and not indicative of a weak consumer. We anticipate rapid rebounds in sentiment as COVID gets under control.
In other areas, the trends – while still positive – have been much more diverse. Moving our focus back to the markets, gains varied widely for the year among the various indexes, with Large Cap Growth stocks leading the way with a 38.5% gain, while Large Cap Value was one of the laggards with a gain of just 2.8%.
The remarkable outperformance of Large Growth vs. Large Value is something we have discussed in prior months, but to recap, this phenomenon was driven largely by the resiliency of many “growth” stocks, such as technology companies that facilitated the abrupt shift to remote working and learning in the face of the pandemic, whereas many “value” companies suffered material setbacks. Recall from our note last month that the news of the successful vaccine trials resulted in a swift rotation into value and small cap stocks. We expect this rotation will persist as investors grapple with stretched valuations amid growth stocks and position for a sustained rebound that will benefit value stocks as the global population gets inoculated against COVID-19. Notably, given the hits to the top and bottom lines that value companies sustained in 2020, Street forecasts call for value stocks to grow revenues and earnings over twice the rate of growth companies in 2021.
Meanwhile, in small cap stocks, we would be remiss if we did not address their continued strength in December, as they climbed 8.7% and added to their historic gains from November. December’s performance allowed small caps to return 20% for the year – a bit ahead of the S&P 500’s 18.4%. What’s particularly remarkable is that earlier this year, small caps lagged the S&P by over 10 percentage points! We believe this illustrates the virtues of an even-keeled investment approach that does not seek to time the market.
And finally, we turn our attention to Fixed Income, where most indexes were modestly positive for the month, and all major indexes were positive for the year – a result of the sharp decline in interest rates, as the Fed sought accommodative policies to support the fragile economy.
The Fed has maintained its position that rates will remain very low for the foreseeable future. We do not expect this to change, and we believe returns within the bond market will be driven by both the level and duration of the Fed’s asset purchases, as well as the market’s expectations for future rate changes, which presumably will be a function of the health of the U.S. economy.
As we look forward to what will hopefully be a much less eventful year ahead, we believe much will be predicated on the trajectory of COVID, how quickly the global population can become inoculated, and how quickly society can return to some sense of normalcy. We also have a new administration coming in, and we’ll be monitoring which policies gain traction and what impact they may have on the markets, as there can always be surprises. As we contemplate our portfolios, we maintain a balanced view. We see many positives on the horizon and also remain mindful that valuations reflect investor expectations for a strong rebound.
The monthly Market Overview is written by two members of MACRO’s Investment Committee, Mark Cortazzo, CFP®, CIMA®, and Christopher Moffett, CFA.
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