Two Steps Forward
While there are many adjectives that could be used to describe the experience for investors in 2020, one that is surely appropriate is breathtaking. In the second quarter we saw the U.S. economy experience a decline in GDP of 31.4%. This accelerated the negative momentum from the first quarter which saw the longest economic expansion in U.S. history come to an end after 128 months of growth. In an extreme, stimulus-driven reversal, the sharp decline of the second quarter was followed by a quarter where GDP increased by 33.4%. We saw the Standard & Poor’s 500 Index generate a year-to-date return of -30.4% from the beginning of the year through March 23, and a return of 70.2% since that date through the end of the year. And finally, the yield on the 10-year U.S. Treasury note, which began 2020 at 1.9%, now currently resides at 0.9%. While these yield figures are significantly smaller than those associated with the economy and equity markets, the magnitude of the decline is indicative of the massive easing of monetary policy that was implemented in response to the pandemic.
Helping to keep the momentum in the economy and financial markets moving in a positive direction are the implementation of two recent steps forward. First, is the approval and distribution of vaccines to eradicate the devastating impact of the coronavirus. Second, is the recent passage of the second round of legislation designed to provide relief to a variety of constituents including individual citizens and small businesses. And underlying these two developments is a commitment from Federal Reserve officials to continue their extremely accommodative monetary policy stance for the foreseeable future.
One Step Back
As discussed above, with the recent passage of additional fiscal stimulus and rollout of vaccines, two steps forward have been taken. Commensurate with these developments, however, has been a resurgence in virus cases around the United States and concern over the prospective impact of holiday travel and winter weather on further extending the proliferation of the virus. This has led to a reinstatement of various restrictions imposed by state and local governments which are intended to stem the tide of increased infections.
Another virus-related concern is the logistical challenges regarding the delivery of the vaccines across the country. We have seen statistical evidence of the increase in virus cases and resulting economic impact. Week-over-week data as of December 29 showed reductions in activity for various facets of the hospitality industry as well as declines for rail car traffic and steel production. Another piece of data which supports the concern of a prospective holiday travel-related increase in virus cases, is the increased number of travelers passing through TSA checkpoints on a week-over- week and month over-month basis. As we progress through the next year, we anticipate there will be additional periodic “steps back” coincidental to the ongoing “steps forward.” But we expect the “forward” will exceed the “back.”
With the trifecta of fiscal stimulus, accommodative monetary policy, and effective coronavirus vaccines, we anticipate 2021 will see meaningful economic growth. The Federal Reserve’s Open Market Committee recently updated its median expectation of GDP growth for 2021 at 4.2%. While we do not make single point forecasts, we are comfortable with anticipating growth in a range of 3.5% to 4.5%. Growth is expected to continue beyond 2021, but at rates closer to the moderate levels experienced through much of the post financial crisis recovery. Economies outside the United States are expected to return to growth mode in 2021 as well with the International Monetary Fund projecting an increase globally of 5.2%. Underlying the forecasted rate of global growth is an expectation that emerging market and developing market economies will see a more rapid rate of growth than those generated by the advanced economies.
Within the United States, growth is expected to be driven by continued strength in housing as well as overall consumer spending, and a contribution from companies replenishing inventories. Consumer spending will be boosted by a reopening economy accompanied by a well-above average savings rate which translates into ample fuel for higher outlays.
Interest rates are expected to increase from the current low levels, but an ongoing focus on supporting economic growth by monetary policy officials will keep them from rising aggressively. Inflation is anticipated to follow a similar path, higher than the rate experienced in 2020, but still quite modest.
Asset Allocation Review and Outlook
Our ongoing commitment to overweighting equities within client portfolios utilizing balanced and growth-oriented objectives continued to be rewarded as strong fourth quarter performance was delivered from both domestic and international foreign stocks. The return from fixed income was just slightly positive for the fourth quarter, generating 0.7% for the period. However, the annual return was solidly positive at 7.5% as the returns generated by bonds in 2020 exceeded the expectations of many financial market forecasters, including ourselves. The result was another year of solid investment performance across all five of our investment objectives.
The return generated from international equities in the fourth quarter was particularly noteworthy as it allowed that segment of the equity markets to reduce the year-to-date performance deficit relative to their domestic counterparts. We are closely monitoring the developments occurring within foreign markets to determine if a change in our current commitment to that market segment is warranted. Overall, we begin 2021 with our overweight to equities intact.
In addition to the domestic/foreign equity dynamic there are numerous other variables we evaluate on a consistent basis. As 2020 showed everyone, the expectations espoused at the beginning of the year can change dramatically in a short period of time.
In addition to the meaningful returns generated by financial assets last year, 2020 also provided a great opportunity for investors to stress test their investment objectives, and their emotions, as we experienced the significant swings in economic performance and investment returns that occurred over the course of the year. We strongly encourage investors to reflect on their experience in 2020 to determine if their stated asset allocation is still in alignment with their goals, objectives, and risk tolerance.
Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
The information within this document is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.