Portfolio Research Director, Kevin E. Donovan, CFA, gives update on 2020 and outlook for 2021.

Kevin E. Donovan, CFA
Kevin E. Donovan, CFAPortfolio Research Director

Hello, I’m Kevin Donovan, portfolio research director with CJM Wealth Advisers. Well, 2020 is in the history books. I’m sure we’re all glad to see that year ago. Luckily for me, I get to talk about the markets, which had an eventful year, but ended up in a pretty good place. We had pretty good returns for the full year. As we can see in the chart here, obviously we had that a rough March where the markets plunged by over 30% followed by a pretty sharp bounce back. And then towards the end of the year, we had some more extra gains. You can see that the S&P 500 increased 16%, pretty far outpacing the Dow’s return of 7%. Now, the reason for that is the S&P is much more influenced by the really big technology companies like Apple, Google, Facebook. And those companies did pretty well during the coronavirus economy. They weren’t really impacted too much.

Those stocks actually gained a lot, which added the outperformance of the S&P 500. We see bonds actually did a little better than the Dow, about 7.5% compared to 7% and international stocks trailed. Once again, only about a 5% increase. Now I should point out though that the international funds that we invest in did significantly better than that index number of 5%.

Let’s take a closer look at what happened in the fourth quarter. Markets bounced around during October, started to go down a little bit. And then the news came out that we had a vaccine, and then the markets really took off after that. The S&P ended the quarter up almost 12%. The Dow had a 10% gain. And you can see a big comeback here international stocks up almost 16% in the fourth quarter. Bonds were basically flat during the quarter.

Let me add one thing to this chart. As you can see in the next chart I’m adding in small cap stocks represented by the Russell 2000 index. And you can see a dramatic increase in small cap performance right here, 31% in one quarter. Now, small cap stocks are very economically sensitive. They’re the first ones to fall at the first sign of economic trouble. And they’re the ones that bounce back the most dramatically when the economy improves. As you can see here with the promise of a vaccine in the hopes of better economy in 2021, that really lit a fire under small caps. They really outperformed.

Looking forward, we expect in 2021 an economy that moves back toward normality. We don’t think it’s going to get quite there yet, but we’re going to hopefully move back towards normality as we get … Well, there’s a promise of more stimulus for one thing. As the vaccine rolls out, hopefully it’ll allow everyone to go back to their normal routines or at least go back in the way of going back to their normal routines. I’m looking forward to that in the 2021.

Now, in terms of the market, we have had a tremendous run-up in the past two years in the US stock market, the S&P 500, if you combined 2019 and 2020, is up 50%. The prospects of additional big years going forward, particularly next year, may not pan out that way, may not be in the cards for US stocks to have a tremendous year of returns, but we are still cautiously optimistic that we are going to see some decent gains.

International stocks, during that time when US stocks were going up 50%, they were about 4% to 5%. There’s a big disparity there between the US and international. There may be some room for international stocks to run here. Particularly with extra stimulus, you may see the dollar weakening against the other major currencies, and that tends to lead to out-performance in international investments. That’s something to look out for.

Something to guard against is if we do see an increase in the economy, it may lead to higher interest rates, which may have a negative impact on certain bond categories, but we still think that bonds are a good place to be particularly to keep that steadiness in the portfolio. And if the stock market does turn South, it provides that safety net that’ll help cushion any potential market losses. Also, there are other areas of the bond market that do well when interest rates rise. And we have some investments that we use in our portfolios to address that as well. I want to wish you a very happy new year. Thank you for all your business with CJM and hope we have a good 2021.