- News of a number of effective vaccines lifted a cloud of uncertainty and unleashed animal spirits.
- For investors who stayed the course in 2020, it was hard to go wrong with nearly all asset classes recording solid results.
- Pent up demand is likely to support a quick rebound by mid-2021 despite lasting damage to some sectors of the economy.
For the full year, almost all major asset classes ended up strongly
Lower political uncertainty, another COVID relief package, and news of a number of effective vaccines boosted confidence that 2021 would see a return to normal. Investors looked through near term weakness to bid up lagging asset classes, resulting in winners all around in the fourth quarter. The S&P 500® posted a robust 12.1% total return for the quarter but paled in comparison to the previously lagging Russell 2000 which returned over 30%. After rallying 40bps in the fourth quarter alone, investment grade corporate spreads tightened to 96bps, just inside of where they started the year. High-yield bonds tightened over 150bps to yield only 4.18% at the end of the quarter, leaving the index with little of its namesake income.
For the full year, almost all major asset classes ended up strongly. COVID continues to weigh on real estate performance, and commodities also lagged, posting negative returns for the year. In contrast, global stocks benefited from a weaker dollar and ended up over 10%. A late rotation catapulted the Russell 2000 over the S&P 500® (+19.9% vs. +18.4%), but technology stocks continued to be in a league of their own with the NASDAQ up over 45%. Fixed income returns were solid with the Bloomberg Barclays U.S. Aggregate Bond Index up 7.5%. Credit’s fourth quarter rally propelled high-yield and investment grade corporates to record low yields, resulting in positive excess returns over comparable Treasury securities of 2.25% and 0.49%, respectively, for the year. Despite the strong positive momentum, equity markets continue to price in stubbornly high volatility. While inflation expectations have perked up, rates remain at historically low levels with even the 30-year bond yielding only 1.65% at the end of the year.
Investment grade spreads are back at tight levels, and yields are at all-time lows