Dear Clients and Friends,
2020 was a transformative year for all of us. The COVID-19 pandemic has reshaped many aspects of our lives. Among these changes, the economy was not left unscathed.
As lockdowns were put in place, many companies were forced to shut down or learn to adapt to the new virtual world. As a result, unemployment skyrocketed, uncertainty rose, and fear struck the markets – leading to a significant decline in the S&P 500 in March 2020. The government used its toolbox to help maintain the economy through this time – including both fiscal and monetary policy. The Federal Reserve (Fed) quickly lowered interest rates, allowing firms easier access to capital. Additionally, the Fed committed to its role as a backstop by purchasing several bond classes that experienced a lack of liquidity. The Federal Government responded through stimulus measures, quickly providing additional unemployment benefits, stimulus checks, and payroll protection for US companies. These combined measures allowed calm to return to the markets and set the stage for an impressive rally in the markets. While challenges still remain, including record unemployment claims, potential inflation, and an increase in mortgage delinquencies and corporate defaults, the actions by the government and the ability shown by corporations to adapt to a new environment have provided a base from which the economy can recover.
For much of 2020, the stock rally was focused on growth companies that benefited from the lockdowns and work-from-home trends. As a result, the S&P 500 is now dominated heavily by mega cap technology stocks (Apple, Facebook, Google, Microsoft, Amazon), introducing concentration risk to investors. These companies thrived amidst COVID-19, and as a result their market capitalizations grew to represent nearly 25% of the index. However, once positive clinical trial results were announced from the Pfizer-BioNTech and Moderna vaccines, market leadership began to shift away from these stocks and into more economically sensitive sectors on hopes the pace of the recovery might accelerate. This rotation into value stocks may continue, especially considering how much they have lagged growth stocks over the past few years.
The presidential election was a major hurdle faced by investors in 2020. After Joe Biden’s victory in November, it was assumed he would likely face a divided Congress, thereby limiting his ability to implement his agenda. However, with the results of the Senate run-off elections in Georgia, the Democrats now enjoy unified control of both the White House and Congress for the first time since 2009. And while markets have typically preferred a split Congress and gridlock in Washington, investors have cheered the idea of Democratic control as it increases the likelihood of additional fiscal stimulus. To that end, Joe Biden recently released a $1.9 trillion stimulus plan, billed as the American Rescue Plan, which includes more direct payments to individuals, enhanced unemployment benefits and support for state and local governments. This, of course, is in addition to the $900 billion stimulus package with similar provisions passed by Congress and signed into law by President Trump on December 28.
For now, investors are focused on the positives of increased stimulus and the hope that vaccines will provide an expedited path to normalcy, thereby resulting in a significant jump in corporate earnings. However, the market currently trades at extreme valuation levels not seen since the tech bubble of the early 2000s, which begs the question of whether it has gotten ahead of itself. And when coupled with excessive bullish sentiment readings across both retail and institutional investors, the market may be susceptible to disappointment and potential volatility as the economy continues to work through the challenges presented by the pandemic. For these reasons, we continue to be positioned defensively within client portfolios.
There are, however, pockets of opportunities throughout markets – including those cyclical sectors and value stocks mentioned previously. International economies, particularly emerging markets, have had an easier time protecting against the spread of COVID-19 and are further along in their recovery. Combined with a weakened US dollar, international markets could be poised to outperform. We also see attractive returns available in certain alternative investments in selective real estate, credit and private equity.
Just as 2020 brought significant change to each of our lives, we expect 2021 will continue to do more of the same – while hopefully getting past the pandemic and bringing us closer to the normal we all crave. If you have questions about your portfolio, please don’t hesitate to reach out.
Gallacher Investment Committee
The opinions voiced in this report are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult Gallacher prior to investing. All performance referenced is historical and is no guarantee of future results. Economic forecasts set forth may not develop as predicted. Research material prepared by Gallacher.
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