Fourth Quarter Market Review

When this year began, no one foresaw the unprecedented events that would shape a year like no other.  The pandemic changed our lives, jobs, economy and portfolios in ways never imagined.  Despite the turmoil, society quickly adapted to the new landscape by changing our social behaviors and embracing new technologies.  While small businesses took the brunt of the disruptions, many large corporations weathered the pandemic quite well and even prospered in these difficult times. 

The recent spike in virus cases has caused a second round of shutdowns in many states and this is beginning to be reflected in some of the economic numbers.  Weekly initial jobless claims are on the rise once again as a second round of layoffs are resurfacing.  Retail sales had the largest decline in seven months as the consumer is treading lightly and saving like never before.  The long awaited second fiscal stimulus should help ease some pain.  Inflation is non-existent at the moment, but the weight of mammoth deficits and excess liquidity provided by the U.S. Federal Reserve will someday lead to higher inflation.   The housing market had a tremendous fourth quarter helping the economy recover.

The stock markets looked right through the concerns of the day and rallied hard on the hopes of a successful vaccine rollout.  A contentious election and concerns of more shutdowns were overshadowed by the Pfizer and Moderna vaccines being approved by the FDA.  If these vaccines are successful, the economy could be in a much better place come summer.  The forward-looking stock market used the fourth quarter to price in future good news.  All the major indices posted large gains this quarter. The Dow Jones Industrial Average crossed the 30,000 level for the first time and returned 10.7% in quarter four.  The S&P 500 gained 12.2% while the NASDAQ Composite added 15.6% in the final quarter.  International stocks also had a profitable quarter with international developed stock markets rising 16.1% and emerging markets adding 19.7% in this three month period heading into year-end.  (1)

The short end of U.S. Treasury yield curve was unchanged during the quarter as inflation remained low and the Federal Reserve stayed on the sidelines. Yields on longer maturities drifted higher on deficit concerns.  Until the economy is fully healed from the pandemic, expect interest rates to remain low.  By quarter end, the 2-year U.S. Treasury Note yielded 0.13%, right where it began the quarter.  At the longer end of the yield curve, 10-year note and the 30-year U.S. Treasury moved higher.  Interest rates on the 10-year and 30-year increased 24 and 19 basis points respectively, bringing their year-end yield to 0.93% and 1.65%.  Mortgage rates remained low helping to sustain the strong housing market.  Credit spreads in both high yield and investment grade corporate debt tightened meaningfully during the quarter.  (2) (3)

Providing an outlook for 2021, after a year like 2020, may be a futile exercise, but let’s try to put the past and the future into context with some thoughts on portfolio strategy, the economy and the markets:

  • Diversifying your portfolio is crucial for long-term investment success
  • Stay nimble and opportunistic, but don’t become an all-in or all-out market extremist
  • Align your risk tolerance and investment objectives with your portfolio allocations especially given the recent strong market performance
  • Distribution of vaccines are paving a way back to economic normalcy
  • Pent up consumer demand could ignite growth in 2021
  • Ballooning Covid-19 cases could pose a short-term economic setback
  • Values in stock market are not cheap at current levels
  • Stocks are trading at 21.8 times 2021 estimated earnings, well above the 5-year average of 17.5 times
  • Stocks are likely to grind higher, but don’t expect a repeat of the second half of 2020
  • Low interest rates will help to support stock prices and the already high valuations
  • Low interest rates will remain for the foreseeable future
  • Federal Reserve will keep their dovish monetary policies in place well beyond 2021
  • Incorporate elements of safety and protection (bonds, annuities, buffered index strategies) for diversification, but avoid getting overly conservative as returns here are minimal

Over the past 12 years, Gradient Investments has grown from a firm with $10 million in assets under management into a well-respected asset manager with over $3.2 billion in assets managed.  Our purpose is to help advisors and their clients navigate their way into and through retirement in a common sense and holistic approach to the markets – with each individual investment plan.  We always strive to make ourselves accessible to clients and advisors to discuss the markets, customize financial plans and provide advice on a one-on-one basis. 

After almost 40 years in the investment business, I am officially retired as of January 1, 2021.  I am leaving a fabulous Gradient Investment team led by Mike Binger and other experienced investment professionals:  Mariann Montagne, Jeremy Bryan, Keith Gangl, Tyler Ellegard and Jordan Thorpe.  I am confident they will continue to provide exceptional service and insight into the financial markets. 

It has been my honor to serve you.  I thank each of you for the relationships and the trust you placed in me and the Gradient Investment team over the years.  Onward and upwards. Best to you in 2021.    

(1) Morningstar market return data

(2) U.S. Department of the Treasury website:

(3) Federal Reserve Bank of St. Louis:


IndexDecember, 2020      Trailing 12 Month
S & P 500                  3.84%                18.40%
Dow Jones Industrial Average                  3.41%                  9.72%
NASDAQ Composite                  5.71%                44.92%
MSCI EAFE                  4.65%                  7.82%
MSCI Emerging Markets                  7.35%                18.31%
Barclays U.S. Aggregate Bond                  0.14%                  7.51%
Barclays U.S. Corporate High Yield                  1.88%                  7.11%
Barclays Municipal                  0.61%                  5.21%
Bloomberg Commodity                  4.97%                 -3.12%

Source: Morningstar

Posted on January 5, 2021
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