Macroeconomic View, Markets & Trading
The year 2020 was a time of unprecedented personal, economic, and political turmoil. Leading to unparalleled market volatility, the deepest recession since the Great Depression (possibly the shortest ever), and a global pandemic, now almost a year old.
The pandemic has forever changed the fabric of our lives as millions of people around the world cope with the lasting impacts of the disease, isolation, death, unemployment, and food shortages. The loss of life is almost beyond comprehension and continues to climb. In the U.S. alone, more than 21 million have tested positive for the virus, 25% of all global cases, and over 360,000 have died. Worldwide, cases are approaching 88 million, with over 1.9 million deaths. Despite the turmoil, most of society learned to adapt fairly quickly by changing social behaviors and embracing new technology, with businesses and consumers adjusting to a new normal. As a result, the stock market began to recover quickly in the spring and continued the rest of the year.
Yet, many in the workforce remain unemployed. The unemployment rate dropped to 6.7% through December after peaking during the pandemic at 14.7% in April. Before the pandemic, in February, the rate was a 50-year low of 3.5%. Unfortunately, the virus has surged again and for the first time since April, 140,000 jobs were lost in December, primarily in the leisure and hospitality industries.
Workers applying for initial unemployment insurance benefits (seasonally adjusted initial jobless claims) ticked down to 787,000 the week ending January 2nd. Weekly claims were only slightly above 200,000 at the beginning of the year. Continuing unemployment claims remain elevated, over 5 million, but the trend is still declining after peaking in late-May at nearly 25 million.
The 3rd Quarter Gross Domestic Product or GDP increased at an annual rate of 33.4%, a snapback from the worst quarter since the Great Depression of -31.4% annualized during Q2. The recovery continues but it will take years, not months, to fully recover. The road will be bumpy until the economy is fully open and economic strength returns to levels last seen a year ago. The climbing infection and death rates are not only a drag on employment but the overall economy, too, as business restrictions are imposed to slow the spread. Turning the infection curve is particularly needed as hospitals exceed capacity with limited staff to handle the influx of Covid-19 cases.
With deep recessionary indicators and surging Covid cases, a long-delayed second fiscal stimulus was passed; together with hopes for a successful vaccine rollout, the stock market rallied with anticipation of further economic recovery. The FDA approval of the Pfizer and Moderna vaccines are lights at the end of the tunnel. The always forward-looking stock market reached all-time highs yet again throughout the quarter as it priced in better times ahead.
As the recovery continues, we need to remember that markets are not linear, with movements both up and down, generally not in a straight line. We believe that 2021 will experience heightened market volatility as the world continues to navigate the complicated vaccine rollout. A market correction of 10% or more is certainly possible and long overdue.
In bonds, high yield corporates led for the quarter, 3, 5, 10, and 15-years, while aggregate bonds led for the past 12 months. Cash continues to be the worst-performing category throughout all periods. Small-cap U.S. stocks led for the quarter and 1-year, while large U.S. stocks led all other categories. Real estate and foreign stocks were the laggards, with real estate being the worst performer for the quarter, 1, and 5-years.
We remain constructive on foreign equity and real estate even though they were the worst-performing categories, and especially as the dollar begins to weaken due to economic stimulus from the Federal Reserve. As a reminder, in these categories, we use actively managed funds and not passive indices. Our actively managed funds have far outperformed their respective benchmarks, which are the passive indices.
In November, we swapped tax-free bonds for tax-loss harvesting from the BlackRock Strategic Municipal Opportunities fund in favor of BBH Intermediation Municipal Bond I based on superior performance. We also selectively added to stocks for those clients underweight based on their specific target. We remain slightly overweight large and small equity and slightly underweight bonds. Since equity valuations are at or near all-time highs, we will be trimming back to target.
Despite market volatility, our portfolios have performed very well on both a total return and risk-adjusted basis. Our tactical allocation of overweight cash going into the pandemic and buying equities in early April paid off handsomely in portfolio performance, reflected in the 1-year returns.
We again recommend that you take what you need out of the portfolio for the next 12 months now based on current market levels so that if we need to sell for that cash distribution, we can sell at all-time highs, not during a downturn. Call or email us to have this discussion ASAP.