Fourth Quarter 2020 Update

January 25, 2021

Key Points

• Many economists and analysts had expected the US economy to have a difficult year in 2020, but it turned out much worse than anyone could have anticipated, and in hindsight was one of the most challenging in the nation’s economic history
• Stocks posted a third quarter of strong gains following the sell-off in 2020’s first quarter. Many broad indexes have now rallied by more than 65% since they bottomed in March.
• While governors in some states maintained stringent lockdown protocols, an increasing number of studies and data from other states with lighter restrictions seem to indicate lockdowns may not be effective.
• While the recovery has been V-shaped, the economy has a way to go to fully return to pre-pandemic levels, and it is anticipated that it could take multiple years to completely recover.

4th QUARTER 2020 MARKET COMMENTARY

Below, we’ve highlighted 2020 broad market returns for the fourth quarter and year-to-date time periods:

Source: Refinitiv

THE GLOBAL ECONOMY

The US economy suffered through the shortest but most severe recession on record as a result of the pandemic, but is in the midst of staging a strong recovery. Agreement in Congress on a $900 billion fiscal stimulus package is expected to avert a double-dip recession. In addition, with the additional fiscal support and the increasing number of Americans being vaccinated, prospects are good that the economic recovery will be able to pick up steam by mid-2021.

The Bureau of Economic Analysis released the third estimate of the third quarter 2020 real GDP, a record-setting seasonally adjusted annualized increase of 33.4%, slightly better than the prior estimate of an increase of 33.1%, and a substantial rebound from the second quarter’s decline.

The employment situation continued to show improvement over the past three months, with employers adding 711,000, 610,000, and 245,000 jobs in September, October and November, respectively. The November report showed an average of approximately 522,000 jobs added each month of the quarter, and that the unemployment rate fell to 6.7%. The Federal Open Market Committee (FOMC) maintained its supportive monetary policy response to the pandemic, leaving the funds rate target range of 0% to 0.25% unchanged. The central bank also reiterated that it expects interest rates to remain near zero until sometime in 2023.

EQUITIES

Stocks posted a third quarter of strong gains following the sell-off in 2020’s first quarter. Many broad indexes have now rallied by more than 65% since they bottomed in March. Market analysts have cited the recently released vaccines as a catalyst for stocks’ strong results. Effective vaccines increase the potential to begin eliminating lockdowns and bringing more segments of the economy back online. After declining in the weeks leading up to the election, stock indexes thereafter trended steadily higher through the end of the year. In addition to investors being encouraged by the speedy development of a vaccine, the market also seems to be digesting the fact that the world seems to be learning to live with the virus. While governors in some states maintained stringent lockdown protocols, an increasing number of studies and data from other states with lighter restrictions seem to indicate lockdowns may not be effective.

FIXED INCOME

The FOMC made no change to the federal funds rate target range of 0% to 0.25%, but in its statement included forward guidance to its asset purchases, which will now continue until “substantial further progress has been made toward the committee’s maximum employment and price stability goals.” In addition, the committee’s new “dot plot” – the forecast of the fed funds rate – shows a median projection of rates remaining near zero through 2023. The FOMC did not change the $120 billion of Treasuries and mortgage-backed securities purchased each month, and analysts expect this amount could increase as Congress continues to have difficulty passing additional fiscal stimulus.

SUMMARY

Many economists and analysts had expected the US economy to have a difficult year in 2020, but it turned out much worse than anyone could have anticipated, and in hindsight was one of the most challenging in the nation’s economic history. Among the contributors to the difficult environment were, of course, the onset of COVID-19 and the subsequent lockdowns that resulted from trying to contain it; the rancorous presidential election cycle; and a slew of geopolitical issues such as the long-running Brexit negotiations and a trade war with China. While the economy is not totally out of the woods yet, the consensus expectation among economists is that 2021 should show a marked improvement.

In addition to the pandemic being likely to wind down, the approved vaccines should enable states to more aggressively open. In addition, a Biden administration is expected to try to deescalate the political rancor that has prevailed this past year. There is a significant amount of pent-up demand for the products and services that have been avoided over the past nine months, and economists believe that higher-income households will be able to increase spending. While the recovery has been V-shaped, the economy has a way to go to fully return to pre-pandemic levels, and it is anticipated that it could take multiple years to completely recover. But the US economy is extremely resilient, and absent policy-making missteps, should continue to make positive strides.

Given that with the onset of winter there has been an uptick in virus cases, economists believe that the first half of 2021 may be sluggish; but, that the second half of the year should see an improvement. The recently passed stimulus package is expected to provide additional fiscal support to the recovery. Economists are optimistic that the recovery from the pandemic will be much shorter than the time it took the economy to recover from the financial crisis.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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