Note: This market review was published on December 28, 2020 and may not be reflective of current market or investing issues.
As 2020 comes to a close, it is a good time to reflect on how markets have performed throughout the year. There has been a multitude of external factors that have had an impact on markets this year that include, Brexit, COVID-19, U.S. Elections, and a trade war. With all of these in mind it is hard to imagine that here in December we would be at or near all-time highs in U.S. equity markets. With that said, investors have had record amounts of support both from monetary and fiscal authorities around the world.
With all of the negative effects that COVID-19 has had on the global economy, as of December 15th, the S&P 500 is up more than 13%1, the NASDAQ is up 39%2, and the Dow Jones Industrial Average is up 5%3 from the beginning of the year. Other asset classes have also done well this year; gold is up 19%4 for the year while silver is up 34%5. However, not all assets have had a great year, the U.S. Dollar has fallen a little over 6%6, and WTI Crude Oil is down over 15%7 after being priced negatively in April.
Central banks around the world have provided unprecedented support to markets this year. The Federal Reserve Bank has gone beyond just the purchasing of U.S. Treasury assets, and has purchased both mortgage-backed securities and corporate debt. This amount of support was needed to provide liquidity in a time when companies were unable to get the funding that they needed in order to continue to operate. The Fed also lowered their overnight lending rate to 0% and has expressed their intent to keep the rate at or near 0% for an extended period of time.
What is really different about the response this time, as opposed to the Great Financial Crisis, is that federal governments around the world have taken a much more aggressive fiscal stance in response to the shutdowns. In the United States, our Congress passed the CARES Act in March that allocated $2 trillion to different programs to support the economy. Some of those programs included direct payments to certain individuals and families based on prior income, loans to businesses to support payroll, and funds to industries that were severely affected by the virus (i.e. airlines). In addition, Congress has also passed additional funding of $908 billion to further support the economy.
While these programs are indeed needed after the economy was all but closed entirely for months, it is not yet known what type of long-term effects they will have on our economy and markets. With the amount of money being printed and spent by the federal government, we expect that inflation will increase, leading to higher commodity prices. Returns for broadly diversified portfolios will vary from year to year but are likely to be depressed over the next decade as we have essentially borrowed against our future returns to fuel this year’s dramatic rally. Fixed income will be one of the most difficult places to allocate funds as rates around the world are near or below 0%, although interest rates are poised to head higher if inflation does start to increase over the next few years.
Longview Financial Advisors, Inc.
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