In this latest installment of our quarterly newsletter, we share our observations on the fourth quarter of 2020 and our outlook for 2021. Click here to go to the full report on our website. Following are highlights:
- We have finally left 2020 behind, and what a year it was. A global pandemic, the ensuing economic fallout, social unrest across the United States, and a contentious election combined to make a year that we will always remember.
- One of the most perplexing elements of the year was the seeming disconnect between the strong performance of the stock market and the sputtering economy. The S&P 500 index marched upward throughout the fourth quarter, continuing the surge since the market bottomed in March 2020. The index gained 12.1% in the quarter to finish the year up 18.3%, including dividends, despite its sharp decline in March. Bonds rose slightly in the fourth quarter, with the Bloomberg Barclays U.S. Aggregate Bond Index gaining 0.7% and ending the year up 7.5%.
- Many parts of the economy painted a different story:
- Hiring slowed in the fourth quarter, continuing the monthly trend since June, and the labor picture weakened at year end as the United States lost jobs in December, the first decline since the spring. The unemployment rate dropped to 6.7%, a big improvement from the 14.7% peak in April; however, this rate is still nearly double the level in February, and there are many who have left the workforce and are no longer counted among the unemployed.
- We expect gross domestic product increased about 5% in the fourth quarter of 2020, following the large swings down and up in the second and third quarters, respectively.
- We are optimistic that 2021 will bring much needed improvement to the global health situation and our economy, however, many challenges remain:
- The storming of the Capitol on January 6th by an angry mob trying to prevent certification of the election results put a spotlight on the deep political divisions in the United States.
- The pace of rehiring furloughed and laid off employees who are still on the sidelines is a major concern. The longer these workers stay unemployed, many of whom are in the hard hit retail and hospitality industries, the more difficult it will be for them to return to the workforce.
- We expect to see a drop of about 9% in fourth quarter S&P 500 corporate earnings compared to the fourth quarter of 2019, which would be slightly worse than the roughly 6% decline in the third quarter due to the resurgence in the fourth quarter of COVID-19 cases.
- The combination of the stock market’s rise and a decline in earnings has led to an increase in the S&P 500 index’s forward price/earnings ratio to about 22.6, higher than historical averages. We believe stocks may take a breather as earnings catch up.
- But, the anticipation of greater government spending from the new Administration and still low bond yields should support stocks longer-term, as well as encourage lending and corporate investments that should boost economic activity.
- We expect economic growth to continue at a moderate pace through 2021, and as it becomes safer to be exposed to others and gather in groups, consumers should resume travel, dining, and entertainment activities that they have shunned for fear of contagion. There is great pent up demand for these and other services, and the spending should boost economic growth.
- Progress with vaccinations will be important to the economy, not to mention human health. The approval and production of several vaccines brings hope for an end to the global COVID-19 pandemic, but the monumental logistical challenges of widespread vaccination have resulted in a slow start. But, we believe that a significant portion of the U.S. population will receive a vaccine by this summer, hopefully bringing the disease largely under control by the end of the year.
- We do not anticipate major changes to our portfolios as a result of current trends, but we are looking for investments that might benefit from infrastructure spending and broader economic recovery, which have the potential to boost value stocks, in particular. Rising yields do not concern us now, but we will be keeping a close eye on yields and any signs of an uptick in inflation.
The Edgemoor Team.
