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 Read More

Vaccine Rally

November provided a glimpse of what the markets could be in a world where COVID-19 is under control.  News of multiple vaccines with effective late phase trials lit a fire under stock prices.  The stay at home stocks sustained the stock market over the past eight months, however it was the beaten down industry stocks that fueled November’s rally.  Energy, airlines, travel and leisure industries exploded higher as investors envisioned a return to life as we knew it. There were a few bumps in the road on the path to all-time high market indices.  COVID-19 cases are peaking once again, and some states are implementing a second round of economic shutdowns.  This tug of war between economic shutdowns and open for business will likely continue until a proven vaccine is successfully administered to the general population. 

The market is also anticipating fiscal stimulus coming to fruition.  The announcement of former Federal Reserve Chair, Janet Yellen, as the incoming Treasury Secretary increases the likelihood of a meaningful stimulus package in the near future.  An accommodative Federal Reserve headed by her former colleague, Chairman Jay Powell, coupled with Yellen promoting fiscal stimulus to a politically friendly audience will be bullish for stocks in the near term.

The economic numbers released in November were overshadowed by the vaccine news of the day.  Regardless, the economy continues to grind forward.  The October unemployment report produced 638,000 new jobs, a slight downtick from the 672,000 gained in September.  The unemployment rate fell a full percent to 6.9%.  Inflation news continues positive for the markets.  The Consumer Price Index (CPI) was flat for the month and up a tame 1.2% on a year-over-year basis.  Similarly, the Producer Price Index (PPI) was up 0.1% for the month and up 1.1% over the past year.  The revised Gross Domestic Product (GDP) confirmed the third quarter 33.1% growth rate.  The consumer pulled back a bit as reflected in lower than expected numbers on both consumer confidence and retail sales.  By every measure, the housing market continues to be red hot. 1

The stock market leaped higher in anticipation of a successful vaccine rollout.  The Dow Jones Industrial Average crossed the 30,000 level for the first time.  The Dow had collapsed to 18,200 just eight short months ago.  This wild ride has played out in all the other major indices also.  The November rally saw a definitive change in leadership as technology took a backseat to the energy, industrial and material sectors.  The Dow led the U.S. November charge posting a 12.1% return for the month, its best monthly return in 33 years and the highest November return since 1928.  The S&P 500 posted gains of 11.0% while the NASDAQ Composite added 11.9% in November.  International stocks also had a profitable month with international developed stock markets rising 15.5% and emerging markets adding 9.3% in this bullish month. 2

The U.S. Treasury yield curve was little changed in November with inflation low and the Federal Reserve squarely on the sidelines.  Low interest rates are likely here for the foreseeable future.  Until the economy is fully healed and/or inflation becomes a serious problem, expect interest rates to remain low.  In November, the 2-year U.S. Treasury note rose 2 basis points to yield 0.16% at month end.  At the longer end of the yield curve, 10-year note and the 30-year U.S. Treasury bond yields fell.  Interest rates on the 10-year and 30-year declined 4 and 7 basis points respectively bringing their month end yield to 0.84% and 1.58%.  Mortgage rates remain low helping to sustain the strong housing market.  Credit spreads in both high yield and investment grade corporate debt tightened meaningfully during the month. 3/4

Hopefully, this parabolic move higher in stock prices has found its way into your investment portfolio.  Once again, it is an appropriate time to review your asset allocations as 2021 is just around the corner.  If the positive price action in the markets has your portfolio overweight in stocks and underweight in bonds and cash, now is a perfect time to reevaluate your asset allocation.  A 10-15% correction in stock prices would not be a total surprise at these valuation levels.  It is better to implement a portfolio rebalancing after a period of market strength rather than after a market correction comes along.  While we are constructive on the markets in 2021, participating with a balanced approached will be less stressful than being caught offsides.


Posted on December 3, 2020 Read More

Election Eve

It’s finally here.  The long awaited 2020 Election Day is upon us and the final election results and the eventual policy decisions may impact economy and the markets for years to come.  The markets seem to be a bit on edge as the pending election can still move us in a variety of directions.  Besides the election itself there are concerns of a contested election, a spike in COVID-19 cases, civil unrest, uncertain future fiscal stimulus and further shutdowns are all weighing on the markets this November.  This is a recipe for increased market volatility as investors try to put 2020 behind them.

While the pollsters and political prognosticators struggle to provide clarity to the election outcomes, the market itself has a long history of accurately forecasting presidential elections.  In the 23 presidential elections since 1928, 14 had U.S. stock market gains in the three months prior to the election. In 12 of those 14 instances, the incumbent party won the White House. In the nine elections preceded by a three-month stock market loss, the incumbents were replaced by the opposition party.  As always there are exceptions to the rule.  In 1956, 1968 and 1980, this theory did not hold.  Still, being correct 20 out of 23 times (87%) is a compelling success rate when it comes to the market’s ability to accurately forecast the presidential election. 1

In the three months leading up to the 2020 election, the U.S. stock market as represented by the S&P 500 did post a meager gain of 0.37% after surviving a 5.6% decline in the last week of October.  Historically, the positive three-month return tells us President Trump will be re-elected to a second term.  In this upside-down year, anything is still possible.  Be prepared to expect the unexpected. 2

Lost in all the political headlines was news that the U.S. economy was continuing its comeback.  The most impressive number released in October was third quarter GDP which showed a record 33.1% annual growth rate.  Granted this announcement was on the heels of a record 31.4% decline in the second quarter, but still was welcomed news.  Other economic numbers gave investors optimism.   Durable goods orders were up 1.9% month over month, nonfarm payrolls added 661,000 jobs in September, the unemployment rate dipped to 7.9% from the previous month’s 8.4%, core Consumer Price Index (CPI) was a tame 1.7%, Producer Price Index (PPI) was 1.2% on a year-over-year basis, retail sales grew 5.4% year-over-year, and the housing market remained strong. 3

The stock market hit a speed bump in mid-October as investors reacted to a global resurgence of the virus, fear of more economic shutdowns, realization that any U.S. fiscal stimulus would be a post-election event, and anxiety over the election itself.  The S&P 500 entered October at a level of 3,380.  It peaked at 3,540 on October 12 and then gave those gains back and more, finishing the month at 3,270.  Other major stocks indices also finished October in the red.   The NASDAQ Composite lost 2.3% in October while the Dow Jones Industrial Average and the S&P 500 also posted negative returns of 4.5% and 2.7% in the month.  International stocks had mixed results with international developed stock markets falling 4.0% and emerging markets were the one bright spot climbing 2.1% in October. 4

With the Federal Reserve on permanent hold and inflation under control, the U.S. Treasury yield curve was stable once again.  During October, the 2-year U.S. Treasury note rose 1 basis point to yield 0.14% at month end.  Longer maturities saw the yield on the 10-year note and the 30-year U.S. Treasury bond move higher.  Interest rates on the 10-year and 30-year each rose 19 basis points bringing their month end yield to 0.88% and 1.65% respectively.  Concerns of mounting federal deficits and future inflation are continuing to steepen the yield curve.  Mortgage rates remain low however, helping to sustain the strong housing market.  Credit spreads in both high yield and investment grade corporate debt narrowed marginally during October. 5

As we look to the future it is important to have both a short-term and a long-term outlook for the economy, the stock market and the bond market.  Over the next three months the likelihood for a post-election fiscal stimulus plan is high, and if enacted this should be favorable tailwind for the markets. Regardless of the election outcome, the short-term looks positive. One caveat is a contested election which could derail any post-election relief rally and stall any stimulus program into next year.

A longer-term outlook will come into better focus after the results of the 2020 elections are known.  The market is familiar with Trump’s policies and will likely respond favorably to four more years of business-friendly decisions from Washington.  If the Democrats take control of Washington, the markets will need to adjust to a new sheriff in town.  Higher taxes and more regulations will likely take a longer-term toll on the markets.

Still looming is the pandemic and the impact it will have on the economy.  Obviously, a successful vaccine sooner rather than later could give the markets a huge boost heading into 2021.  Regardless of your political leanings or COVID-19 beliefs, your portfolio should be well balanced heading into the election and year end.  Take the breaking news of the day in stride, control your emotions as best you can and keep your portfolios well-diversified at a risk level designed for your personal financial situation.



Posted on November 3, 2020 Read More
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