The U.S. economy grew at a 33.4% annualized rate in the third quarter (most recent available) after GDP plunged 31.4% in the second quarter when the economy went into lockdown. A resurgence in consumer spending in the third quarter occurred as the economy reopened. Economists expect a modest gain in the final quarter of 2020, which will be released on January 28. Given the vaccine rollout, economists are forecasting an acceleration in economic growth for the second half of 2021 after a bumpy first half.
In late December, Congress finally passed a second COVID-19 relief bill totaling $900 billion of economic stimulus after passing the $2 trillion CARES Act in March. President Joe Biden unveiled a $1.9 trillion stimulus proposal on January 14 as the Labor Department reported nearly a million new jobless claims, the highest since last summer. Nonfarm payrolls fell by 140,000 in the final month of the year as COVID-19 cases surged. This monthly drop in payroll was the first since April. The unemployment rate steadied at 6.7% in December, although the headline numbers are likely misleading as unemployment likely exceeds 20% for the lowest-paid workers. Economic momentum is fading as consumer confidence fell in December along with weaker retail sales. COVID-19 will continue to weigh on consumer spending until the vaccine is widely distributed. Core CPI remained steady at 1.6% in the 12 months through December, well below its 50-year average of 3.8%. Economic growth for the second half of 2021 is forecasted to accelerate as vaccine distribution continues.
The Federal Reserve is committed to keeping interest rates low until the economy recovers, even if inflation exceeds its 2% target level. Monetary and fiscal policy support in 2021 should help provide a bridge to a post-pandemic economy. The Bloomberg Barclays U.S. Aggregate Bond Index experienced a modest return of 0.67% in the fourth quarter but increased 7.51% for the year. Treasury bonds lost 0.8% in the quarter but returned 8.0% for the year. High yield and emerging market (EM) bonds had the strongest fixed income returns in the quarter, up 6.0% and 5.5%, respectively. The yield curve is expected to continue steepening as there is little chance the Fed will raise the fed funds target range from 0% - 0.25% any time soon. The dollar will likely remain weak into 2021.
The S&P 500 delivered a wild ride in 2020. The index gained 12.2% in the fourth quarter, finishing the volatile year up 18.4%. It tumbled at the fastest pace ever in February and March, followed by the sharpest recovery in history. All sectors reported gains for the recent quarter as investors anticipated the recovery that having access to the COVID-19 vaccine could provide. Energy and financials were the strongest sectors in the quarter, up 27.8% and 23.2%, respectively, recovering from declines earlier in the year. Real estate and consumer staples were the weakest, up 4.9% and 6.4%, respectively. The tech sector increased nearly 44% for the full year despite weaker relative performance in the final quarter. Value stocks made a comeback in the quarter outperforming growth stocks. The forward P/E for the S&P 500 ended at 22.3x for the quarter, above its 25-year average of 16.6%. The index’s 10 largest stocks traded at 33.3x while the remaining stocks traded at 19.7x. EM equities outperformed both U.S. and international developed markets in the final three months of 2020 – increasing 19.8% for the quarter and 18.7% for the year. Latin America posted strong returns in the quarter.
The Bloomberg Commodity Index rose by 10.2% in the fourth quarter, mainly from strength in crude oil and agriculture prices. U.S. crude oil prices moved up to $49/barrel as global demand is recovering, yet the level remains below where it started the year at. Gold prices were flat in the quarter but increased 24.4% for the year as a result of safe haven demand during the pandemic. REITs improved by 9.2% in the quarter as REIT sectors most impacted by the pandemic saw signs of recovery. Despite its recent rally, REITs were the worst-performing asset class in 2020, down 8.7%.
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