"2020: The Movie" through a market lens
2020 can be described as one of those suspenseful horror films that eventually surprised everyone with its twists and turns towards a happy ending — in this case for the financial markets. After an initial shock last March when the global pandemic dropped the curtain on the world economy, the stock market delivered an unbelievable performance last year. Smashing through all previous box office records, the S&P 500, Nasdaq, and Russell 2000 indexes reached new all-time highs in 2020 with returns of 18.4%, 44.9%, and 20.0%, respectively. Even the bond market put in a star-studded performance of 7.5% for the year that saw 10-year yields fall to a record low of 0.50%.
As lead actor, the Federal Reserve deserves the Oscar for its role in turning the stock and credit markets around after intense fear from the unknown COVID-19 virus gripped investors. Pulling out the script from the 2008-2009 Great Financial Crisis, the Fed immediately cut rates to 0% and reintroduced its favorite classic — the quantitative easing program, casting first-time guest appearances by investment grade corporates, municipal bonds and even exchange traded funds. Best supporting actor awards go to the White House and Congress for the CARES Act which provided an income bridge for small businesses and individuals until the economy could begin to reopen last summer. And, finally, the award for best picture has to go to the U.S. medical science community for developing the vaccines we had all been hoping for, and setting the stage for the next act.
This report was prepared by J. Brian Henderson, CFA, Chief Investment Officer for BOK Financial.
More from the Report:
2021–An encore? Possible…perhaps even probable
Economic recovery may have an intermission until the vaccine is more widely distributed later this year.
Passage of major tax and spending programs is unlikely, but expect a Biden presidency to bring change to U.S. economic, regulatory and international policies.
Look for vaccines to be center stage in releasing pent-up demand for travel and live, in person experiences – an economic shot in the arm that could mean annualized quarterly growth rates as high as 6% by summer.
What’s the script for the 2021 financial markets?
2020 – The Sequel “2021” shows promise for above-average performance…but sequels often lag the original.
Expect above average economic and profit growth, but – SPOILER ALERT – much of the 2021 good news is already priced into current market levels.
Interest rates are likely to remain low; the Fed’s spotlight will be on balance sheet expansion to keep P/E multiples elevated and credit spreads tight. 2021 performance will be driven primarily by earnings.
Arm-chair predictions for overall 2021 market performance
- U.S. Equities – Single digit returns
- High Grade Bonds – Low starting yields and improving GPD growth will make for a tough year as long-term rates creep up
- International Markets – More room to run as the global economy improves
- Bottom line – Above average economic growth and average market returns