At the beginning of the year, the United States was enjoying the longest expansion on record. The economy seemed poised to continue its run with the signing of trade deals with Mexico, Canada and China. Donald Trump held comfortable leads in most polls and markets were breaking to new highs. By the end of the first quarter the Covid-19 virus had plunged the US economy into recession and ushered in the fastest bear market with the S&P 500 ultimately declining 34%. Unprecedented monetary and fiscal response saw 5 different relief packages, the largest non-war stimulus in US history, the Fed balance sheet expanding by 70% in just 2 months, record low interest rates and the fastest recovery from a bear market ever. In the final quarter of the year alone we saw the introduction of two vaccines for Covid-19, developed in one tenth of the normal time, a new President elected and a surprise election outcome in Georgia, leaving the Federal government entirely in Democrats’ control, though by the slimmest of margins. The fourth quarter also witnessed a changing of the guard in stock leadership with international, especially emerging markets, value and small cap the stars. There have been many false starts when it comes to leadership change in the past 12 years, but this has the potential to last longer.
Despite a negative return for the month of September, equities ended the quarter with the best two quarter advance since 2009. The historic rally over the previous six months can be attributed to the remarkable economic progress made in the wake of the Covid lockdown together with a lack of investment options at a time when the money supply is growing at 24% year over year. Both the economic and market rebounds owe a great deal to the unprecedented support from the Federal Reserve and Federal Government. Generating heightened volatility in the final weeks of the quarter, however, questions arose over the continuation of fiscal stimulus from the Federal government. The result was the first negative monthly return for stocks since March. September was also notable for a rotation from growth into value, led by Materials, Utilities and Industrials. Emerging market stocks were relative standouts in
September, helping them to best US indices for the quarter; developed markets continued to lag. Value and emerging outperformance can be early indicators of economic expansion and increasing investor appetite for risk. Value stocks have a long way to go before establishing a trend and catching up to growth, however; they still lag significantly for the quarter and year (where they are still in fact negative).