In contrast to the first six months of 2020, financial markets saw strong growth in the second half of the year, bringing calendar year stock and bond returns into positive territory as 2020 came to an end.
Investors looked past the continued spread of COVID-19 and instead focused on a combination of unprecedented monetary and fiscal stimulus, as well as positive news on vaccine development and distribution. Small cap U.S. equities led the way, delivering a 20% return for the year, a sharp reversal from the first quarter when it was the worst performing style. Large cap U.S. stocks slightly underperformed vs. small cap, rising 18%. International equity markets showed signs of life as well, with developed markets up over 8% and emerging markets up nearly 19%.
Following the gradual restart of global economic activity and easing of oil-related tensions between Saudi Arabia and Russia, commodities began to recover, but still posted a single digit decline for the year. With the U.S. Dollar value declining due to the unprecedented level of monetary stimulus, commodities could be poised to perform well in 2021.
Fixed income continued to provide portfolios with ballast, with the Barclays U.S. Aggregate Bond Index rising 7.5% as the Federal Reserve reaffirmed its commitment to maintaining low rates for the foreseeable future. The concern going forward is that rising interest rates could put pressure on bond valuations, particularly for longer term debt.
We have seen incredible exuberance around mega-cap growth stocks (which returned 38.5% for the year!) while large value stocks have been largely ignored (up just 2.8% for the year as a group). The following table shows the P/E (price to earnings) ratio of the largest 10 S&P 500 stocks compared to the other 490 stocks in the index. While the P/E ratio is high for all stocks, it does not necessarily equate to being overvalued. Rather, it suggests that the market expects an earnings recovery to follow the vaccine rollout—but the margin for error in mega-cap stocks in particular is razor thin.
Looking ahead, the passage of a $900 billion stimulus package should alleviate fears about permanent economic scarring and provide markets with a solid foundation as the calendar turns. With personal balance sheets being in a much stronger place than they were following the 2008 financial recession (higher savings rates and lower debt), 2021 should see the beginnings of a return to normalcy.
Notes on the Recent Stimulus Package
Congress agreed to a second stimulus package to end the year and hit many of the same areas that the original CARES Act did, but with more targeted impact. There will be $1,200 stimulus payments made to joint tax filers making less than $150,000 and $600 payments to single filers making less than $75,000. Unemployment benefits will have $300 added to the standard payments. These benefits are exactly half of the first stimulus.
For small business owners, additional funding for the Paycheck Protection Program (PPP) was added. Some employers could be eligible for a second loan if they have used all funds from the first loan and gross receipts have dropped 25% or more in one or more quarters of 2020 when compared to comparable quarters the year before. Notably here, the recent stimulus bill now makes expenses paid with your PPP loan fully tax deductible, superseding prior announcements made by the IRS to the contrary. We suggest allocating extra time to speak with your tax accountant this year about these new provisions and planning for your PPP loan forgiveness application with your lender.
Upcoming Financial Webinars--Mark Your Calendars
Alex has prepared four financial webinars on a variety of topics and will host one per month through April. Please visit our website https://www.fncadvisor.com/webinars to view the topics and register. These webinars are free and not limited to clients, so feel free to invite family or friends to participate. We have recorded and posted about two dozen previous webinars over the last couple of years. These include topics like FIRE (Financial Independence and Retire Early), saving for college, and generational wealth transfer. If you have a topic you’d like us to cover in the future, please let us know!
The COVID pandemic has accelerated not only the transition from paper to electronic delivery of statements, reports and shareholder documents, but also in the set-up and servicing of accounts. eSignature instead of paper applications is now required for some major account custodians and will be the norm very soon. \
However, we know that the newest technology isn’t always compatible with older devices, is difficult for some clients to use, and is at times, just straight overwhelming and confusing. The reliance on technology raises significant data security concerns and, of course, requires another password. UGGGH!
Each of our clients has different preferences on which account information they want to view, and the method they want to access it. We therefore have a couple of ways to securely deliver the information clients want to see. The links to all of these can be found on our website here: https://www.fncadvisor.com/client-logins
First, we have the newest client portal which has detailed account information including holdings, historical transactions (back to 2006!), and a secure document vault. The client portal is technology we license from Envestnet/Tamarac and there is a mobile app available called WealthView (from Tamarac) which is available in Google Play and Apple store.
Second, we have our Wealth Management System (licensed from eMoney—a Fidelity owned company). This is our comprehensive financial planning technology which allows you to link your bank, investment, credit card and retirement plan accounts to not only see your “big picture” in real time, but is the basis for retirement and college savings projections, etc. There are no mobile apps for the Wealth Management System, but it is designed to be mobile friendly, so you can add a bookmark to your mobile device to access it from your phone or tablet. Note: We have single sign on capability from the Wealth Management System to our new client portal. At the top of the Wealth Management System menu, there is a symbol next to the “bell” that says Envestnet/Tamarac sign in. If you click on the symbol and input your credentials to the client portal, you can access it in the future without having to re-input the information.
Third is our ShareFile quarterly report cloud storage vault where previous quarterly performance reports were uploaded. We will be phasing out this vault eventually. If you have documents in ShareFile that you would like us to transfer to the new client portal vault, please let us know and we’ll take care of that for you.
Last are the custodian websites and mobile apps from Schwab and Fidelity. We strongly urge all clients to have access directly to the custodians for eSignature approvals of all account services like new accounts, wire transfers, address changes, etc.
If you need assistance with accessing, using or even opting-out of any of the technology choices we offer, please do not hesitate to contact us.