2020 Economic Review
Submitted by Kaizen Financial Advisors, LLC on January 15th, 2021
2020 RECAP
- The pandemic sends the economy and financial markets reeling
- Congress passes $2 trillion economic stimulus bill
- The global economy stumbles, but adopt several important trade agreements
- Vaccines emerge as the stock market ends the year at record levels
THE YEAR IN BRIEF
The global pandemic disrupted economies, financial markets, and daily life in 2020. Households and businesses were put to the test during the toughest and grimmest years in decades. The winter brought a resolution to the U.S.-China tariff dispute, the Brexit referendum, and the first U.S. appearance of the novel coronavirus. As spring started, abrupt stay-at-home orders in response to COVID-19 curtailed business activity, which dampened consumer spending. The federal government responded, arranging stimulus payments for millions of Americans.
Wall Street bounced back from its March lows, but the economy has been slower to recover. The pandemic entered its worst phase in fall, but two highly promising vaccines were announced in November, and as winter started, they began to roll it out to the public. On the cusp of 2021, Congress approved a second national economic stimulus, and the European Union and the United Kingdom signed off on a post-Brexit trade deal.
There are many unanswered questions as we enter 2021. Will mass vaccination happen as quickly as we anticipate? Will a successful vaccination program lead to more hiring, more travel, more in-store shopping, and more confidence? The financial markets will be watching progress on this effort.
THE U.S. ECONOMY
The pandemic sent the U.S. economy into an abnormal phase, and so our fundamental economic indicators displayed atypical readings.
The Department of Labor's main jobless rate, 3.5% in February, hit 14.7% by April. Headline unemployment declined for the next seven months, to 6.7% by November. The U-6 unemployment rate, measuring unemployment and underemployment, peaked at 22.8% in April.1,2
As people stayed home, consumer spending trended lower, falling 6.9% in March and 12.6% in April.3
The federal government moved to boost economic activity. As March ended, a $2 trillion economic stimulus bill became law, featuring cash payments to households, temporary increases in federal unemployment benefits, and a Small Business Administration program pledging to offer distressed companies funds equivalent to 8 weeks of payroll costs. The aid began rolling out in April, and in May, the White House unveiled Operation Warp Speed, a public-private partnership to produce COVID-19 vaccines in record time. Two vaccines were approved by the Food and Drug Administration by fall.4,5
The Federal Reserve took the benchmark federal funds interest rate down to a target range of 0-0.25% and revived emergency loan programs first introduced in 2008. It collaborated with the Department of the Treasury on efforts to buy corporate bonds and encourage business loans. In a monetary policy shift, the central bank said in August that it would accept average inflation of 2% for the near term and was willing to tolerate a little more inflation in the economy while pursuing the goal of full employment.6,7
As stay-at-home orders lifted, the economy rebounded. Gross domestic product, which the Bureau of Economic Analysis said had contracted 31.4% in the second quarter, grew 33.4% in Q3. The BEA also recorded a 41.0% Q3 climb for consumer spending. Stay-at-home orders returned in Q4, however, prompting another federal economic stimulus in December.8
The housing market stayed strong. By November, existing home sales were up 25.8% year-over-year, according to the National Association of Realtors; Census Bureau data showed a 20.8% annualized improvement for new home buying.9,10
The U.S.-China tariff dispute eased throughout the year. In the January 2020 trade talks, the U.S. promised to lessen import taxes on Chinese goods, and China agreed to buy more American exports.11
THE GLOBAL ECONOMY
The International Monetary Fund expects the world economy will contract 4.4% in 2020. If that estimate holds, 2020 will be the worst year for global growth since the 1930s.
The U.S. economy shrank 4.3% in 2020, according to the IMF's forecast. That is better than the 8.3% setback estimated for the eurozone. The IMF projects that China's economy grew 1.9% last year. As for 2021, it sees GDP advances of 8.2% for China, 5.2% for the eurozone, and 3.1% for the U.S.12,13
The European Union and United Kingdom agreed to a post-Brexit trade deal on December 24. This completed the Brexit process, which began with the 2016 leave vote and included the U.K.'s formal exit from the E.U. last January. Businesses and financial firms based in the U.K. now face new trade rules and costs, even with the new pact in place.14
Looking at stock benchmarks around the world, there were more ups than downs. South Korea's Kospi Composite stood out with a 30.75% 2020 gain. Argentina's MERVAL climbed 22.93%, Taiwan's TWII 22.80%. Two other notable 2020 advances: Japan's Nikkei 225 added 16.01%, and China's Shanghai Composite rose 13.87%. There were also notable retreats: Indonesia's IDX Composite lost 5.09%, France's CAC 40 7.14%, Russia's RTS 10.42%, and Spain's IBEX 15.45%. The MSCI EAFE index, a broad benchmark tracking developed-economy stock market performance in Europe and Asia, rose 5.43%.15,16
LOOKING BACK, LOOKING FORWARD
Both the S&P 500 and Dow Jones Industrial Average ended the year at record highs. On December 31, the S&P settled at 3,756.07; the Dow closed at 30,606.48.17
The Nasdaq Composite notched a solid gain for the year. The tech-heavy benchmark rallied strongly from its March low, as employers, schools, and households worldwide invested in software and hardware that let people work and learn from home. Its final 2020 settlement: 12,888.28.
The Russell 2000 small-cap index also did well in 2020, rising 18.36% and ending the year at 1,974.86.17,18
In another notable development, the yield of the 10-year Treasury note dipped below 1% on March 5. It briefly flirted with 1% in the fall but ended the year below the mark.19
Just how volatile was Wall Street last year? Look at what went on with the S&P 500. The index sank 8.4% in February and 12.5% in March, closing the door on an 11-year bull market. Then it rebounded 12.7% in April. And its comeback was just beginning. By August, it had recovered 100% of the losses it incurred in the Q1 downturn, and it ended up notching 33 record highs during the year.17
MARKET INDEX |
2020 |
2019 |
2018 |
2017 |
Aggregate Bonds |
+7.51 |
+8.72 |
+0.01 |
+3.54 |
Int’l Developed |
+7.82 |
+22.01 |
-13.79 |
+25.03 |
Emerging Markets |
+18.31 |
+18.42 |
-14.57 |
+37.28 |
S&P 500 |
+18.40 |
+31.49 |
-4.38 |
+21.83 |
REITs |
-7.90 |
+25.76 |
-4.84 |
+4.18 |
|
|
|
|
|
BOND YIELD |
12/31 RATE |
1 YR AGO |
5 YRS AGO |
10 YRS AGO |
10 YR TREASURY |
0.93% |
1.92% |
2.27% |
3.30% |
Sources: Yahoo Finance, December 31, 2020
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year Treasury real yield = projected return on investment, expressed as a percentage, on the U.S. government’s 10-year bond.
*International Developed is represented by the MSCI EAFE NR USD index. Emerging markets is represented by the MSCI EM NR USD index. REIT
is represented by the Wilshire US REIT TR USD index. Aggregate Bonds is represented by the BBgBarc US Agg Bond TR USD index.
Is Wall Street witnessing the infancy of another powerful bull market, destined to last for several years? Or are analysts being too optimistic about equities?
It's impossible to know for sure, but what we do know, is that 2020 ended at record highs, which no pundit expected. Proving again, it rarely pays to make investment decisions based on emotional responses to current events. So as we start 2021, our mantra is the same, stay diversified and invest in broad chunks of the market. Adhering to this discipline puts you in a position where you can potentially benefit no matter which asset class is outperforming during a given period of time.
We look forward to helping you achieve your financial goals in the new year!
CITATIONS:
1. Trading Economics, January 2, 2021
2. CNN Business, May 8, 2020
3. Investing.com, January 2, 2021
4. Los Angeles Times, December 18, 2020
5. Treasury.gov, January 2, 2021
6. New York Times, December 23, 2020
7. Reuters, August 27, 2020
8. The Balance, December 27, 2020
9. Reuters, December 22, 2020
10. Census Bureau, December 23, 2020
11. NPR, January 15, 2020
12. Seattle Post-Intelligencer, December 31, 2020
13. CNN Business, October 13, 2020
14. The Week U.K., December 23, 2020
15. Barchart.com, December 31, 2020
16. Wall Street Journal, January 1, 2021
17. Los Angeles Times, December 31, 2020
18. CNN Business, December 31, 2020
19. Treasury.gov, December 31, 2020
20 Yahoo.com, January 6, 2021