S&P 500 SOARED AGAIN
Stocks posted a +12.2% gain in 4Q2020, following an +8.9% gain in the third quarter and a +20.5% surge in the second quarter of 2020, which followed the COVID bear market loss in the first quarter of 2020 of -19.6%. Not only did the S&P 500 recover from the -33.9% COVID bear market loss, but it broke its pre-pandemic high.
COVID AID SENDS SAVINGS SKYWARD
Disposable personal income was sent skyrocketing in April 2020 by COVID aid totaling nearly $4 trillion. It sent personal savings surging to a once-unfathomable 32% rate! A new aid package expected to be enacted would send savings surging again. The excess liquidity is driving capital-gain asset prices higher.
ENERGY WAS WORST SECTOR AGAIN
Propelled by Facebook, Amazon, Apple, Netflix, Google (FAANG), tech stocks outperformed all other industry sectors again. It was the sixth consecutive quarter in which 12-month returns on the 10 industry sectors were led by tech stocks and energy industry shares were the poorest performers.
INDEXES TRACKING 13 ASSET CLASSES
Across a diverse group of 13 asset classes, what stands out is the doubling of the S&P 500 in the five years ended 12/31/20. Since 1926, stocks have historically averaged a +10% return annually. Doubling historical returns is particularly unexpected, considering the February–March 2020 COVID bear market loss of –33.9%.
EQUITY RISK PREMIUM
Over the 23 years ended 12/31/20, a risk-free 90-day U.S. Treasury bill averaged +1.86% annually, compared to +8.08% on stocks. That’s equal to a +6.22% annual premium for taking the risk of owning stocks through the tech crash of 2000, the 2008 global crisis, and the COVID bear market.
WHAT TO EXPECT
The equity risk premium grew because stocks, relative to bonds, grew more valuable. Stocks have been trading above the historical price/earnings ratio. With the normal valuation relationship between stocks and bonds out of whack, stock plunges should be expected. Volatility spikes, in red, grew more frequent in 2020.
Past performance is never a guarantee of your future results. Indices and ETFs representing asset classes are unmanaged and not recommendations. Foreign investing involves currency and political risk and political instability. Bonds offer a fixed rate of return while stocks fluctuate. Investing in emerging markets involves greater risk than investing in more liquid markets with a longer history.