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January 2021 Investment Commentary

Financial markets posted a very strong fourth quarter, crystalizing a remarkable recovery from the spring sell-off.  Consequent healthy 2020 returns built on robust 2019 gains.  Along with the continuing effects of aggressive assistance from the U.S. government, the quarter was helped by a series of successes in the COVID-19 vaccine development effort, along with increasing clarity around the U.S. presidential election and transition.  The year’s swings indeed were notable, with a harrowing 33.9% drop in the S&P 500 index from February 19th through March 23rd followed by a 67.9% index rise over the rest of the year.

Client portfolios benefited in the quarter and year, largely powered by strong equity performance.  Maintaining exposure through the crisis and over the year (and rebalancing further into stocks in April) proved to be important.  Active managers added value, and propitious stock-picking was well rewarded, as owners of the likes of Zoom (up 395.8%) and Tesla (up 743.4%) would attest.  The pandemic created clear dividing lines in sector performance, with companies in online retail, technology, home improvement and food retail dominating the winners list, averaging about a 40% gain, while the weakest stocks were in the airline, hotel, cruise line, energy, and real estate investment trust sectors, averaging about a 30% loss. And while domestic growth stocks dominated, later in the year we saw greater contributions from U.S. value and non-U.S. investments. 

Bonds, notably corporate and Treasury securities, also provided healthy returns, with interest rates dropping from year-end 2019 on a flight to safety trade.  The ten-year Treasury yield shed a full percent, from 1.91% to 0.91%, reaching an all-time low of .60% in March.  And thanks to 2020’s U.S. dollar weakness (the euro and yen respectively gaining 9.3% and 5.3% against our currency), global bonds fared particularly well, as indicated by the chart’s one-year return in the context of its five-year annualized gain.


  Fourth Quarter 2019  Five Years (ann.)
World Stocks 14.7% 16.3% 12.3%
S&P 500 12.2 18.4 15.2
Emerging Markets 19.7 18.3 12.8
Developed International Stocks 16.1 7.8 7.5
Global Bonds 3.3 9.2 4.8
Commodities 10.2 -3.1 1.0

In a year marked by a devastating health crisis and severe economic dislocation, financial markets may have seemed incongruously buoyant.  But, along with the developing news on vaccines, the massive and quick fiscal response, beginning with the $2.2 trillion CARES Act in March and ending with a follow-on $900 billion support package in December, played a key role.  Even before the recent legislation, the various paycheck protection and unemployment insurance enhancements provided an incremental $1 trillion to after-tax personal income compared to 2019.  Combined with dramatically reduced spending (mostly services, travel, and other hospitality) on the order $535 billion, personal savings surged in 2020.  This supported bank and investment assets, including stocks.   

The creation of multiple effective vaccines, notwithstanding late year disappointment with the pace of dose administration, has been another key market driver, as it has allowed us to look beyond the grim present.  With cooler weather and holiday travel, the U.S. daily death rate has roughly tripled since our last quarterly letter.  And as we’ve all heard repeatedly, the next few months, the winter, are expected to be the hardest yet, in terms of health impact.  Spurred by the scale of the human emergency, competition, and technological advancement, pharmaceutical companies and governments around the world have risen to the challenge. To be sure, financial markets and economic outlooks would look very different if vaccines were still a year or two away, a timetable more in line with previous virus responses.

Financial markets seemed to also respond well to the election news, first simply by having the question answered and uncertainty thus eased, and then taking in stride the challenges, audits and recounts, and oncoming electoral tally and certification.  Even the horrific events at the U.S. Capitol on January 6th, the day set for the certification, did not undermine the markets: the mayhem and six-hour delay effectively disarmed the Congressional protest faction, removing any uncertainty around the tally’s outcome.  The election in fact was not terribly close.  Along with his 306-232 electoral win, and 7.1 million popular vote edge, Joe Biden won counties that account for a dominant 71% of U.S. economic output. 

And now with a narrow 50/50 Democratic majority in the Senate thanks to two Georgia run-off wins (plus the Kamala Harris tiebreaker), investors do not seem to be fearing a Blue Wave of aggressive legislation.  Biden has pledged to reverse much of the 2017 tax bill and has ambitious spending goals, upwards of $3 trillion, including long sought-after infrastructure outlays.  But bipartisanship still will be needed, and after COVID, fiscal rectitude is likely to return not only among Republican senators (particularly now with the White House in opposing hands), but to some extent Democrats as well.  More simply, after adding $4.4 trillion to our national debt in 2020, creating a debt to GDP percentage (100.1%) not seen since World War II, some tightening of the purse strings seems likely.

The new administration will take the reins at a delicate point in our economic journey.  Fourth quarter growth looks to be solidly in the mid-single digits, supported by strong retail spending, but it will still be a loss of output for the year of possibly 2-3%, and tough COVID months lie ahead.  And while government support has pushed up income, we’re still well short on actual employment.  We lost 22.2 million jobs in March and April -- or almost all of the 22.8 million gained in the prior ten years – and have regained 12.3 million since, through November.  While an extra $1400 in individual unemployment assistance may be considered, this and all the other support have a finite life.  Many sectors, led by hospitality and travel, are desperate to return to work and more permanent incomes.

As 2021 progresses, economic growth is expected to snap back on the order of 5-6% in the U.S., and perhaps a bit better on a global basis.  But, lacking historical parallel, no one really knows what this pivot will look like.  Presumably, if a certain level of immunity and comfort is reached – with vaccines administered to a solid majority of the population by sometime this summer -- there will be pent-up spending as consumers emerge from their shells, returning to restaurants, hotels, airplanes and concerts.  On the other hand, there may be more permanent changes tied to lifestyle, pressuring, for example, office real estate and in person shopping.  Longer term, we’ll also have to sort out the pandemic’s broad impact on trade, education, and productivity.  The experience of COVID-19 has so profoundly affected everyone.  Time will tell whether and how much we as a society and an economy return to and/or redefine whatever is “normal”. 

In terms of investment opportunity, the post-COVID landscape will be sure to engender and reward innovation and adaptability, building on trends spurred by the crisis itself.  Some of this might be borne from frustration and lessons learned, including a sub-par U.S. handling of the pandemic giving rise to new approaches to logistics.  We’re likely to see increased efficiencies in manufacturing, and new incentives to automate, and reduce human exposure, in order to avoid future disease outbreaks.  And there have been and will continue to be many breakthroughs on the human health front, including advances in telemedicine, and enhanced diagnostics and home testing, which can be bridged from COVID to other illnesses.

After a strong two years for stocks, and COVID-driven earnings headwinds, valuations are elevated.  According to J.P. Morgan, the S&P 500 now trades at 22.3 times forward earnings, while the 25-year average is 16.6 times, and this assumes a healthy earnings recovery.  The lofty valuation owes a lot to the top ten stocks by market capitalization, mainly the large technology names, who as a group trade at 33.3 times next year’s estimates, but the rest of the S&P still carries an above-average 19.7 forward multiple.  Developed international and emerging market stocks, having until recently returned less than U.S. stocks, are generally cheaper and reasonably close to longer term average multiples. 

As for portfolio strategy, we are maintaining overall allocations to stocks, taking the longer view and looking for recoveries in economic and corporate performance to support valuations.  But we are adjusting positioning by adding to cheaper, U.S. dividend paying stocks, and trimming exposure to the pricier names.  The move also pushes up exposure to companies that could benefit from economic recovery, and enjoy enhanced exports tied to the weaker dollar.  We continue to counsel inclusion of non-U.S. stocks on diversification and relative valuation grounds.  We also retain a manager initiated last April with a health care/biotech and technology emphasis, who should be well positioned to tap the continuing innovation theme beyond COVID. 

In the more bond-oriented portfolios, we are shifting a small amount from a flexible mandate bond fund into an enhanced cash manager with a more reliable return stream.  Bond valuations in general are elevated after the 2020 move and a multi-year disappearance of yield, so we will maintain a short bias in our bond mix.  The overall built-up bond allocation remains as a portfolio risk modifier.  We expect recovery from COVID in 2021, but also acknowledge risks, including unforeseen setbacks in the vaccination and immunization effort. 

On balance, we have faith in the resolve of those fighting this battle, which is, effectively, all of us.

We wish you the best for early 2021.  As always, please feel free to contact us with any questions or concerns.


David S. Beckwith, CFA

Managing Director & Chief Investment Officer



This letter may include forward-looking statements.  All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”).  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.