Market Insights: Fourth Quarter Wrap-up

Market Update

2020 was a year none of us will soon forget. It started strongly, with equity markets at all-time highs and unemployment near record lows. By mid-March, a new coronavirus had reached North America after emerging overseas in late 2019. Governments around the world abruptly shuttered their economies and issued shelter-in-place orders in an effort to slow the spread of the disease, resulting in sharp and drastic declines across major stock indexes globally. As the first wave of COVID-19 infections began to slow over the second and third quarters of the year, markets staged an impressive recovery. This was particularly true in the U.S. where the S&P 500 Index, a broad representation of the U.S. equity market, regained all its losses by mid-August – the fastest rebound on record.

Despite a resurgence of COVID-19 cases and renewed lockdowns in many regions, markets trended upward during the fourth quarter of 2020, boosted by growing clarity around the outcome of the U.S. presidential election and significant COVID-19 vaccine progress. With the rollout out of approved vaccines across many developed countries including in Canada, the U.S. and the U.K., the global outlook for an economic recovery is improving, although there will undoubtedly be some volatility along the way.

The S&P 500 Index experienced a pullback due to uncertainty in the days leading up to the U.S. election but soared in the weeks that followed, driven by the energy and financials sectors, to end the year at a new all-time high. The U.S. index was up 7.1% for the fourth quarter and 16.1% for the year in Canadian-dollar and total-return terms. By comparison, the S&P 500 Equal Weight Index was only up 10.2%, signifying the specific strength of large cap tech companies boosted by the stay-at-home economy. The Dow Jones Industrials Average increased 5.1% for the year. The MSCI EAFE (CAD) Index, which reflects returns for developed Europe, Asia, and Far East, was up 10.7% for the quarter and 5.9% for the year on a total-return basis. The MSCI Emerging Markets (CAD) price index showed strength on a weakening U.S. dollar, climbing 13.5% in 2020.

The Canadian economy was boosted by stronger demand for energy and higher oil prices in the fourth quarter, along with the approval of Pfizer’s COVID-19 vaccine. While the S&P/TSX Composite Index has moved upward since its pandemic-induced low in March, the Canadian benchmark has yet to return to the record level reached in February. The index posted a gain of 9.5% for the quarter and 5.6% for the year on a total-return basis.

Interest rates remained unchanged in Canada, the U.S. and Europe during the final three-month period of the year. In December, the Bank of Canada held its benchmark interest rate steady at 0.25% after cutting rates in March in response to the COVID-19 pandemic. The Bank of Canada reiterated that it would continue to buy Government of Canada bonds at a rate of about $4 billion per week to keep downward pressure on interest rates and restated that it would keep the benchmark lending rate near zero until sometime in 2023. The U.S. Federal Reserve maintained its target for the federal funds rate at a range of 0% to 0.25%. The European Central Bank held interest rates on its main refinancing operations, marginal lending facility and key deposit rate at 0.00%, 0.25% and -0.50% respectively, and expanded its monetary stimulus program.

In the commodities markets, gold had a standout year, increasing 25% on the back of rising balance sheets for the world’s central banks. On the other hand, the pandemic stifled demand and the price of oil declined 21%. However, prices rose significantly in the fourth quarter, helping the energy equity sector close out a very difficult 2020 on a positive note. Meanwhile, on the heels of U.S. production declines and rising exports, natural gas prices rose 16%, for the first annual increase in four years.

Milestone strategy and outlook

The events of 2020 have shown us how unpredictable markets, and life in general, can be. At the beginning of the year, no one could have predicted a global pandemic unfolding, or that markets would plummet only to recover in record time, or that the best-performing stocks would be those that enabled work-from-home and e-commerce.

One of the best ways to protect your portfolio from the unexpected is diversification. We have worked together to broadly diversify your investments and ensure that all your eggs are not in one basket. It is also important to stay invested. Those that sold their investments after markets plummeted in March would have locked in losses, while those that stayed invested would likely have been rewarded for their patience when markets recovered later in the year.

Looking ahead, the pandemic will continue to affect markets in the coming months as vaccine distribution gets underway. Accommodative fiscal and monetary policies from central banks around the world are also expected to continue for some time, and we believe they will help provide an economic cushion to the increase in recent COVID-related lockdowns. We just witnessed another U.S. stimulus package this past quarter to the tune of $900 billion and $600 direct cheques to U.S. residents, with some expecting these direct payments to be boosted to $2000. The measures also extended unemployment benefits, as well as support for various other government programs. Until we see a wider rollout of vaccinations to help improve economic growth in the back half of this year, it is reasonable to assume we could see more stimulus packages ahead.

Looking at the Canadian economy, we are expected to post the highest deficit-to-GDP ratio amongst developed countries in 2020 on the back of significant Federal government stimulus; however, the country has recouped nearly two-thirds of the jobs lost initially due to COVID-19, and this, coupled with stimulus measures, should help buoy the country in early 2021.

Although the unexpected occurred this year, we believe the short-lived recession in the U.S. will eventually be backdated as ending in Q3 or Q4 at the latest - the fastest recovery on record - showing the resilience of the U.S. consumer. It continues to be our stance that we are in a secular bull market that began in 2009 and are still in the middle innings, with past secular bulls lasting on average 18 years. With unprecedented stimulus and low interest rates, this secular cycle may last longer. The price action of markets of late is certainly providing a positive investment environment. On the earnings front, which ultimately drives equity prices, Q3 earnings topped expectations and we are hopeful this past quarter will see a repeat. It is worth mentioning that we are seeing respected strategists predicting that 2021 may see the strongest year-over-year earnings increase since 2010.

With the prospect of further fiscal stimulus and continued robust credit markets, our confidence remains high that the global economy will return to its pre-COVID path by the second quarter of this year, and that global growth may top the current consensus estimate of 5.4% growth for 2021, perhaps even higher than 6%. In addition, we believe emerging markets may be heading into a strong growth cycle, supported by favorable domestic tailwinds, and the spillover effects from stronger U.S. growth, widening U.S. current deficit and a weaker U.S. dollar. Emerging markets have lagged the rest of the world for the last 11 years and are currently trading at the most attractive relative valuation to the U.S. in 20 years. We also believe that the U.S. core Personal Consumption Expenditures (PCE) Price Index, the favored inflation measure of the U.S. Fed, may overshoot 2% this cycle, aided by healthy private sector risk appetites and highly reflationary monetary policies even as the U.S. and Canada make good strides towards its pre-COVID path. As a result, a more active and sector specific investment approach should be successful.

In ending, we would like to wish you and your family a happy and healthy new year. We would also like to thank you for your continued trust in us and for the opportunity to assist you in working toward your financial goals. Should you have any questions regarding your portfolio that arise from these comments, please do not hesitate to contact our office.

Here is our Milestone Market Report on economic data, capital markets, commodities, and currencies through December 31: (click image for PDF version)

 

Sources: CI Global Asset Management, Financial Post, CNBC, Wealth Professional, Thomson Reuters, Bloomberg, TD Newcrest, PC Bond, Morgan Stanley, Teranet & National Bank of Canada, Canaccord Genuity