Fourth Quarter 2020: Hindsight is 2020: What Now?
An optimistic fourth quarter capped a wild and turbulent year in the capital markets. The stock market, which had rallied since the March lows on the back of unprecedented global fiscal and monetary stimulus, was given another boost in November as news broke on the success of multiple COVID-19 vaccines. The vaccine news largely benefited the stocks that had been laggards in the rally from the bottom, with value, small-cap, and international markets leading the market higher. Small-cap stocks earned enough during the quarter to overtake the S&P 500 for the full year, with the Russell 2000 doubling since March and earning 20% for the full year.
Some signs of excess exuberance have shown up in the markets. Day traders have increasingly used options to gain exposure to certain technology shares, investors’ margin debt is at an all-time high, and fund flows into leveraged and inverse exchange-traded funds are just behind the 2008 peak. Even still, with interest rates at record lows for the foreseeable future, expensive capital markets might just be here to stay as well. Bonds were little changed in the quarter, with a slight uptick in Treasury rates offset by a compression in spreads. The Bloomberg Barclays Aggregate Index was correspondingly up less than 1% for the quarter.
While Wall Street has priced in a recovery, backward-looking economic numbers are still telling a more dismal story. Five million more people are unemployed in the US than were in February, and weekly initial jobless claims have averaged 800,000 in the fourth quarter. A new round of stimulus signed into law just before the New Year should help bridge the gap for some individuals until state governments can effectively administer a vaccine and life can return to some form of normalcy.