As we move through the holiday season and collectively reflect on what has been an incredibly challenging year, we stay firm in our belief that the holidays are all about giving thanks, being grateful, staying humble and wishing for the best. To that end, we wanted to express three things as they relate to our clients, the economy and markets, that occurred in 2020 that we are grateful for and three wishes we have for 2021.

Grateful That the Market Ignores the Media

We remain incredibly grateful that sentiment in the media is not an accurate reflection of the state of the capital markets. Although we have experienced a highly volatile year, it would have been an even bumpier ride if the market took its cues from the media. Even more, if the media drove the markets … no one would have made money by investing in 2020. Fortunately, the market is a reflection of the future economy. In other words, the market discounts its expectation of future economic activity and reflects those expectations in today’s prices. This phenomenon does well to explain how markets have done so well at a time when the virus is surging and millions remain unemployed. Unequivocally, the market is telling us that things are likely to get much better. There is a light at the end of the tunnel.

Grateful That Bonds Still Provide the Best Portfolio Insurance

Bonds have become, for good reason, an unloved asset class. Gone are the days that investors could earn 5 percent or more from interest on high-quality bonds. Interest rates have plummeted to levels never seen in our lifetimes. In fact, the 10-year U.S. Treasury continues to sit below 1 percent. With ballooning central bank balance sheets across the globe and the Federal Reserve stating that they do not expect to raise rates until at least 2023, it is unlikely that we will see rates move much higher in the coming years. While the interest rate environment is somewhat depressing for bond investors, 2020 once again proved that bonds are the best and cheapest portfolio insurance that you can buy … an insurance policy that pays you interest. Between mid-February and late-March, the stock market declined 34 percent. On the other hand, standard bond indices were up around 10percent. The age-old stock-bond hedge did an amazing job at limiting portfolio damage at the onset of the pandemic.

Grateful That the Vaccine Is Being Distributed

Just last month, Pfizer announced a 95% efficacy rate of their COVID-19 vaccine along with plans to initiate mass distribution -- the FDA granted emergency use authorization on December 11th. Pfizer’s announcement was followed by the likes of Moderna, AstraZeneca and others. Until these announcements we were all stuck in state of uncertainty about when, if ever, the pandemic would come to an end. While there are still hurdles to overcome in mass production and circulation of the vaccine, we can all be grateful for the knowledge that we know it is coming at some point next year, whether it be in March, June, September or later.

We Are Wishing That the Unemployed Are Able to Return to Work

Aside from the staggering mortality caused by the pandemic, the damage to the labor force has been the most tragic result of COVID-19. Going into the year, only 2.5 million Americans were unemployed. That number jumped to a horrifying 25 million in April. Incredibly, this number has fallen back below 10 million despite continued lockdowns and surging daily cases. That said, there is still a long way to go and we are very hopeful that the number of unemployed continues to decline.

We Are Wishing That 2021 Corporate Earnings Forecasts Prove Correct

The most important long-term driver of the stock market remains corporate earnings. After all, for markets to rise, its constituents must continue to increase profitability. As a result of the pandemic, 2020 earnings are expected to decline some 15 percent. However, the combination of residual benefits from the $3 trillion CARES Act, accommodative central bank policy, the upcoming vaccine and material pent-up consumer demand are expected to generate corporate earnings growth of 22 percent next year. If these forecasts are realized, this would leave corporate earnings at record levels which in all likelihood would allow markets to continue their march higher

We Wish That All of Our Clients and Their Families Stay Healthy

Above all, we hope that through the holiday season and into next year our clients and their families stay healthy and safe. We wish that, as regulations and comfort levels permit, our clients get to spend time with their beloved families and stay positive about an improving world as we turn the page and move on to next year.

Takeaways for the Week

2020 will go down in history as a memorable and unpredictable year for everyone
We wish you all happy and healthy holidays

Disclosures