A Farewell to 2020
The precarious year of 2020 – which saw both a pandemic and Presidential election has now come to a close, and investors are left asking, “What’s next?”
Equity
Notwithstanding the memorable nadir of the March market meltdown, the stock market had an exceptional year. The DOW and S&P 500 closed the year at all-time-highs and the tech-heavy Nasdaq gained over 43% for the year. Small-cap stocks also got in on the action and the Russell 2000 surged over 30% for the last quarter.
It seems that hope springs eternal in the market: despite the winter surge in Covid-19 cases, new lockdowns, record unemployment and delays in vaccine rollouts, and not to mention the new strain of the virus in the UK, investors stay looking ahead at a potential economic recovery.
Additionally, the current low-interest rate environment only helps to catalyse stock market surges — as it leaves little other options for investors seeking higher returns on their portfolios.
On the election front, the preliminary results of the Georgia run-off point to a Blue Wave, with Democrats wrestling control of the Senate. Investors have interpreted this to mean more fiscal spending and stimulus, which is expected to push stocks even higher. However, a Democrat win still leaves fears of increased regulation on Big Tech companies, and higher corporate taxes.
Looking ahead, the Federal Reserve estimated that the US economy will grow 4.2% in 2021 and the unemployment rate will hit 5%, down from current levels but above where it was going into the crisis. However, much of this progress depends on how quickly vaccines are administered to the public and whether they have a meaningful effect on the curbing the spread of the virus.
While the year 2020 is now behind us, investors cannot yet breathe a sigh of relief, as we expect volatility to remain present in the market until the virus is under control, after which the market direction will begin to pivot on policy debates under the new Biden Administration.
Fixed Income
The benchmark 10 year Treasury yield rose from 0.84% in November to 0.93% in December as investors said goodbye to 2020. The 10 year Treasury yield is used to gauge investor sentiment, since it can serve as proxy for measuring how confident investors are in the economy.
Bond yields move inversely to prices. When investors are confident in the economy and markets, the demand for bonds decreases in favour of riskier assets like stocks, thus bond prices drop and their yields consequently rise. The opposite effect occurs when investors are spooked and pour into bonds as a safe haven. The 10 year Treasury yield started the year at 1.88%, and dropped as low as 0.32% during the Covid-19 sell-off in March.
In the last Federal Open Market Committee Meeting for the year, the Federal Reserve maintained their accommodative stance, seeking to achieve maximum employment. With the current period of low inflation, the Fed is willing to let inflation run above 2% so that it will average 2% over the longer term. The Fed also decided to keep the target range for the federal funds rate at 0% - 0.25% until labour market conditions have reached maximum employment and inflation is on track to exceed 2% for some time.
The Fed is also aiming to increase its holdings of Treasury securities by at least US$80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until the maximum employment and price stability goals are met. These asset purchases help to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
In terms of Corporate Credit, the percentage of debt being issued in the market is close to all-time-highs, which means companies have access to enough cash to finance their needs going forward.
In the current low yield environment, lower rated corporate bonds that offer a higher spread are becoming more attractive, with the caveat that Covid-related defaults continue to increase. However, we expect those default rates to trend downwards heading into Q3 2021 when vaccines have been widely distributed, preventing the need for harsh lockdowns.
Originally published in the Trinidad and Tobago Business Guardian Newspaper on behalf of Ansa Merchant Bank.
The information contained in this article is not intended and should not be used or construed as an offer to sell, or a solicitation of any offer to buy, securities of any fund or other investment product in any jurisdiction. The information in this article is not intended and should not be construed as investment, tax, legal, financial or other advice. Past performance is not indicative of future performance.
