capital markets commentary
Equity markets were largely positive in February. Rapidly rising treasury yields and continued optimism surrounding post-pandemic normalization resulted in a rotation towards value and small-cap equities. The steeping yield curve pushed fixed income prices lower, particularly longer duration bonds. Within commodities, tighter supplies and weather events across Texas contributed to energy returns while economic recovery projections have boosted industrial metals.
Global markets opened the year mixed, affected by uncertainty and volatility surrounding the retail investor frenzy and an unclear outlook for deploying coronavirus vaccines. The equity market was paced by U.S. small cap and emerging markets. Rising yields hampered fixed income returns while the energy market experienced a strong month as a result of tighter supplies.
Fueled by the pandemic, 2020 began with extraordinary market volatility through March 23. After markets bottomed, equities steadily recovered to reach all-time highs by year-end. Forceful central bank monetary policy and massive fiscal expenditures to combat the economic effects of COVID-19 boosted stocks. As central banks ramped up quantitative easing and interest rates declined, bonds experienced a substantial rally. Companies with the ability to quickly adapt or those already positioned for a remote world saw the largest gains demonstrated by the dominance of the technology sector.
This Investment Outlook updates Ellwood’s asset classes views expressed in our Mid-Year Investment Outlook, published in July 2020. The world will be in a period of transition during 2021—optimistically moving from alarming levels of COVID-19 infections to a growing percentage of the population vaccinated. While we will not be surprised by bouts of volatility including larger equity drawdowns, Ellwood sees a continuation of the economic recovery, buoyed by supportive monetary and fiscal policies.
Global markets ended a tumultuous year with many global indices at or near all-time highs. Investors maintained a risk-on investment posture during December, supported by new stimulus packages in Europe and the US, alongside the launch of each regions vaccination program. Gold and energy prices appreciated as gold posted the biggest annual advance in a decade, aided by the dollar’s decline to the lowest mark since April 2018.
Encouraging news regarding impending COVID-19 inoculations and further clarity on the U.S. presidential transition dramatically boosted stocks across the global markets, with many surpassing all-time highs. U.S. small cap equities paced the markets with the Russell 2000 Index producing its best month on record. Energy prices also participated in the vaccine optimism, climbing in November, while gold prices experienced the worst month in over four years.
Global risk assets mostly retreated in October on the back of rising new coronavirus cases in the U.S. and Europe, fresh lockdowns in Europe, signs of a tightening election in the U.S., and the absence of any progress towards a pre-election fiscal stimulus. Energy returns once again declined with oil prices hitting four-month lows on demand concerns.
The third quarter started off with a bang in a continuation of the second quarter’s sharp rebound. By August 18, the S&P 500 Index fully recovered the 34% loss experienced during the February-March correction. As cities across the globe continued their re-opening plans after pandemic-induced shutdowns and central banks sustained their support for global markets, markets moved higher during July and August. In September, market sentiment turned negative, with most risk assets posting losses. Still, the third quarter was solid overall, with most market segments posting positive results.
Mega-cap technology companies experienced a swift sell-off in September and briefly pushed major U.S. indices into correction territory before hopes of further U.S. fiscal stimulus helped alleviate concerns at month-end. U.S. growth companies were the most impacted while non-U.S. equity declines were more muted. Demand concerns weighed on energy returns while metals prices also retreated.
Major domestic indices reached record highs in August, bolstered by an ultra-accommodative Federal Reserve policy and growing optimism for a COVID-19 vaccine. U.S. growth continues to lead the way while U.S. value, small cap, international developed equity, and emerging markets experienced less torrid appreciation. Rising yields hampered fixed income returns whereas commodities gained, supported by a weaker U.S. dollar.