In this week’s market update: a quick review of the winners and losers of 2020; the US election finally draws to a close; while investors head into the new year in optimistic mood.
So, let’s start with a quick look back at 2020. Focus only on the start and finish points and you’d think it was an OK year, good growth but nothing special. What happened in between was, as we’ve discussed throughout the past 12 months, anything but normal.
To take the S&P 500 as an example, the US index started the year at 3,231 and ended it at 3,756. That was a 16% gain. Good but actually the US market has risen by between 10% and 20% about a quarter of the time. What the start and end year figures don’t tell you is that the S&P visited 2,237 along the way. The performance from the start to the bottom was -44%. From the bottom to the year end was +68%.
So, lots of volatility, and lots of opportunity to both make and lose money. All in all, a challenging year for investors and anything but normal.
Growth-focused shares headed the leader board once again. Large cap growth and small cap growth were the best two performing asset classes in 2020. Large cap growth has been in the top two positions in five of the past six years as it happens, which is why simply buying a US tracker fund five years ago would have been a pretty smart move. Defensive growth is what the US market specialises in.
The unusual nature of 2020 is shown by the third and fourth best-performing assets, however. Inflation-linked Treasuries and gold make the top four a strange mixture of growth and safe havens. Optimism tempered with fears about inflation and economic uncertainty.
At the bottom end of the leader board, REITs confirmed what a tough year it’s been for commercial real estate as the pandemic undermined the case for both retail and office property. Commodities were the second worst performer as parts of the world’s economy shut down for significant periods last year.
Just as large cap growth has dominated the winners, commodities have been at the bottom of the table in six of the last nine years as the post-financial crisis era has been characterised by sluggish growth. Another prominent underperformer has been cash, unsurprisingly given the persistence of rock bottom interest rates. It is hard to see that changing in the near future. Cash, of course, has a role to play even if it offers next to no yield. In a volatile market like we had last year, some dry powder was essential if you were to take advantage of the opportunities.
As we move into 2021, investors are broadly optimistic that this year will see a return to some kind of normal. European shares, in particular, are on the front foot thanks to the pre-Christmas signing of a trade deal between the UK and EU. In the US, the focus over the holiday period was on a new fiscal stimulus package. Underpinning the optimism world-wide are hopes for a rapid roll-out of Covid vaccines.
The need for the new jabs has been highlighted in recent days by a fast-deteriorating situation on the ground in many countries, particularly in Europe and the US. Restrictions continue to ratchet ever tighter here in the UK, with a third national lockdown, including further school closures, announced this week. Across the channel, a range of measures including curfews are being implemented in a bid to control the virus.
Investors continue to look through the current worries, in the main, with markers like the MSCI World index hitting another record high this week and the oil price sitting safely above $50 a barrel. Yesterday, the FTSE 100 rose by nearly 3% at one stage and closed 1.7% higher. China also added to last year’s strong gains as the New Year opened. Only Wall Street cast a cloud, down 1.5% as Donald Trump’s refusal to go quietly started to look like an undeclared attempted coup in the world’s leading democracy. The pound, sensitive to both Brexit and Covid news, is at its highest - nearly $1.37 - since early 2018.
Brexit finally reached a conclusion on Christmas Eve with the widely-predicted eleventh hour compromise enabling a pretty thin trade deal to be signed off on both sides before the end of the year when come what may the UK was going to be out of Europe.
Signing a deal averted the potential chaos of a No Deal exit, avoiding tariffs and quotas on the trade in goods, even if the agreement has nothing much to say about the more important services side of the economy. The talking goes on for the industries that really matter to the UK such as financial services.
Doing the deal allows Boris Johnson to say that he Got Brexit Done, as he vowed to do during the election campaign a year ago. What is rather less clear is what Britain intends to actually do with its new-found control of money, laws and borders.
By chance, however, the Prime Minister will this year have two big opportunities to present a Global Britain agenda at the G7 summit in June and again at the COP26 climate summit in November, both of which the UK is hosting. At both he will want Britain to be taking the lead as the world emerges from the pandemic and starts to build back better in a more sustainable way.
Still, from an investor’s perspective what matters most is that the Brexit uncertainty has largely gone away. The hit to the economy has broadly been priced into what is one of the world’s most out of favour stock markets. There is plenty of scope for catching up and the London market may end up being one of the better performers of 2021.
The big news this week from a market perspective could turn out to be political, however. Although we are two months on from the Presidential election, the final result for the White House is yet to be confirmed by Congress. That should happen on Wednesday when the House of Representatives signs off on the electoral college result that handed the White House to Joe Biden. Whatever Donald Trump is saying, the US institutional support for the democratic process looks secure. We must hope so.
Even more important from a market perspective is the outcome of this week’s run-off in the Georgia Senate race which will determine whether or not the Democrats have control of both houses of Congress as well as the White House, the so-called clean sweep.
To do that they will need to secure both the Senate seats up for grabs after November’s inconclusive votes. If the Democrats win both, the Senate will be split 50:50 and that means that vice President Kamala Harris will hold the deciding vote.
That could potentially unlock Joe Biden’s more ambitious tax and spend agenda, although the wafer-thin majority in Congress means that the usual gridlock and horse-trading in Washington is likely to continue through at least the next two years before the mid-term elections. How investors respond to the Georgia outcome is uncertain. In some ways a hamstrung White House is the best outcome for markets.
On the corporate front the first week of the year tends to be quiet. There is usually a big focus on how busy the shops were in the run up to Christmas and retailers and hospitality companies line up to provide their seasonal trading updates. This year, things might be a bit quieter on that front because it’s pretty obvious to all that it was a difficult year. If we weren’t already in a kind of lockdown then we were clearly heading that way. Just living to fight another year will be the most that many businesses can hope for.
That said, the early news has been positive. Next said it expects profits to recover quickly after the pandemic ends. It has benefited in particular from its online offering. Meanwhile Morrisons said like-for-like sales rose 9% as shoppers stocked up on luxury Christmas treats like champagne and salmon.
And finally, investors in bitcoin will look back on the last quarter of 2020 as a remarkable time for the investment that continues to defy the sceptics. Hitting $34,000 at the weekend, the crypto-currency has now trebled in value since the summer. With some observers talking about $100,000 as the next stop while others denounce the rise as a speculative bubble with no fundamental value. The direction of travel from here is anyone’s guess.
Optimists see bitcoin as a viable alternative store of value in a world where paper currencies stand to be debased by governments printing money to fund fiscal stimulus programmes. In this environment bitcoin is seen as a kind of digital gold. But it remains untested, unregulated and impossible to value.