After a year like 2020, this year has to be better, right? In many ways 2021 will be better than last year, but investment returns may not be one of them. The global pandemic of 2020 has spilled over into 2021, but vaccines have been developed and approved and distribution has begun. The divisive US election is over and new leadership in the White House promises less combative relationships throughout the world. As more of our population is immunized from the coronavirus, we may soon be able to enjoy graduation, wedding and birthday celebrations again. The return of restaurants, hotels and travel will help reduce unemployment toward pre-pandemic levels and restore our ability to connect with family and friends.
After the initial shock and financial panic caused by the virus, investment markets stabilized and vaulted to new highs at the end of 2020. Large Cap US Stocks gained 18% for the year, led by the technology companies that thrived during the pandemic. In the 4th quarter, signs of broader market strength appeared as Small-Cap US Stocks and Foreign Stocks posted strong results. Bond prices also posted solid gains in 2020 as interest rates fell to historic lows. At the start of 2020 money market interest rates had increased to around 2%, but they quickly dropped back toward 0% with the onset of the pandemic. In the end, despite a sharp Bear Market in March, a diversified portfolio produced satisfactory gains for the year.
With the support of both fiscal and monetary policy, the global economy has withstood the sudden deep recession. In the US, the unemployment rate rose to 14.7% in April and has since declined to 6.7% at year-end. To support those who have been impacted, government assistance has been generous with additional unemployment benefits and direct cash payments to most low and middle income individuals. Many Americans have used these additional government payments to reduce their consumer debt and boost their savings. Personal financial balance sheets have improved and when the virus slows consumer activity is primed to surge higher. We hope this economic boost will bring back full employment.
US Corporate earnings declined by around 20% due to the economic lockdowns, but stock prices rose as investors looked forward to the post-virus economy. In 2021, we believe earnings will gain more than 20%, but think most of those expectations are already factored into stock prices. We always preach that corporate earnings drive stock prices, but in 2021 the price gains may not match the increase in profits. It may also be difficult for Bond values to go up in 2021. Interest rates are likely to remain low, as the Federal Reserve Bank tries to support economic growth, but further gains in the price of Bonds would mean interest rates dropped further to new historic lows. And the yield on Cash is back to 0.01%. Even with a full economic recovery from the pandemic and a return to more normal lifestyles, 2021 could prove to be a challenging year for investment returns.
Our country and the world has paid a large price for the global pandemic. More than 1.9 million people from every region in the world have died (not including China, which officially reports less than half as many deaths as the State of Massachusetts). The health care system remains stressed and many people have missed normal medical treatments due to capacity constraints. While the pain is still being felt, there’s hope that we will conquer the virus in 2021.
This article was authored by Christopher Borden, a financial advisor and Managing Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or [email protected]
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Talk to your financial advisor before making any investing decisions.
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