With a pandemic, the shutdown of the global economy, the deepest recession since the 1930s, and an equity-market meltdown followed by a powerful rally—2020 continues to surprise.
As sharply as the US equity bear market began, so it ended. The rebound from the late-March lows was so quick and strong it capped the shortest bear market in history and marked the fastest round trip back to all-time highs.
Driving the Rally: Fiscal and Government Stimulus
In the first half of 2020, the US Federal Reserve took very strong action to support the economy, including the following measures:
- Cutting the federal-funds rate to zero
- Opening or expanding a wide range of facilities designed to support different parts of the fixed income market
- Doubling the Federal Reserve’s balance sheet
In August 2020, the Federal Reserve also adopted an average inflation targeting (AIT) operating strategy. Using the AIT strategy, the Federal Reserve will aim to achieve inflation of above 2% for a period of time to make up for years of undershooting this target.
To achieve this goal, the Federal Reserve has pledged to hold the federal-funds rate at its current 0%–0.25% target range until inflation is at 2% and on track to moderately exceed 2%.
Consumers and small businesses have borne the brunt of the economic damage brought on by COVID-19. In response, the Federal Reserve has shown a willingness to buy almost unlimited quantities of Treasuries, which has enabled the US government to deploy the most aggressive fiscal stimulus since World War II.
This legislation has provided significant help to individuals, companies, and state and local governments, but it hasn’t prevented the economy from falling into recession in terms of lost output and higher unemployment.
As many provisions of the early stimulus packages expire, the market expects additional stimulus. To date, however, this fourth stimulus bill has seen delays as the two sides debate the size and scope of the next bill.
Uneven Stock Recovery
While the economy continues to slowly gain its footing, many parts of the stock market have already rebounded to previous levels—and even reached new highs.
This recovery has been incredibly uneven, with vast differences between sectors, styles, and regions. Some parts of the market remain in bear market territory, including airlines, energy, and banks. Other sectors—such as technology, communication services, telehealth, and online retail—are performing well.
Technology stocks in particular have benefited from changes introduced during the lockdowns, including:
- Changes to the way we work, connect to each other, teach our children, entertain ourselves, shop, exercise, see our doctors—even the way we eat.
- Increased adoption of technologies and a boost to current earnings as consumers go online for purchases, make more use of video-call technologies, and watch streaming services; and as businesses invest heavily in digital transformation, including cloud computing and heightened cybersecurity, to support remote work.
- A decline in government bond yields has also benefitted growth stocks. When analysts value stocks using discounted future cash flow methodologies, lower yields imply higher valuations for companies with strong growth prospects.
Globally, there’s also been a dispersion by sector and style performance. Emerging Asia has done well with their more heavily growth-oriented indexes, while areas with more traditional value-oriented weightings, such as Europe and Japan, have lagged.
Stock Rotation Potential
While many growth-oriented companies have pulled forward significant adoption of their services—and may therefore be justified in the higher multiples—value stocks have continued to lag. However, these value sectors may be poised to outperform once the world emerges from the COVID-19 pandemic.
This is why it’s important for investors to consider geographic and sector diversification. By taking risk tolerance and investment objectives into account, investors can stay the course; a diversified portfolio and long-time horizon can give comfort in the midst of short-term volatility.
We’re Here to Help
As the fourth quarter of 2020 gets underway, there remain risks to the economy and markets—including uncertainty surrounding the election, the possibility of a second wave of the virus, increased tensions with China, and a potential flattening of economic data.
To learn more about your portfolio’s areas of opportunity or the potential impact of global events, contact your Moss Adams advisor.
Note on COVID-19
During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: