Asset Class Recap as of 12/31/2020
While many parts of 2020 were unpleasant, markets were generally kind to investors who stayed fully invested throughout the year. Equity markets had a strong pullback between February 19 and March 23, the period during which many investors became very concerned about the potential impact of COVID on markets. The S&P 500 index dropped roughly 35% during that period. One CNBC article from March calculated that it was the “fastest 30% sell-off ever, exceeding the pace of declines during the Great Depression.” The subsequent recovery has been swift (by historical market recovery timeline standards) and strong. The S&P 500 index recovered the 35% drop and more, ending 2020 with a total return of 18.4%.
Returns for most asset classes posted better returns than their 20 year averages. The table below compares last year’s total return for common asset classes to the 20 year annualized returns (what we might consider close to “normal” long term returns).
Growth stocks had a terrific year, as demand for many technology related products jumped due to COVID related changes we have all had to work through. Apple and Microsoft, two of the largest stocks in the technology sector, were up 82% and 42% for the year.
Value stocks had positive but very low returns, lagging growth significantly, largely due to financial and energy sector stocks. Financial Select Sector SPDR® ETF (ticker: XLF), a popular ETF that tracks the financial sector, returned -1.7% last year. Many financial companies have a difficult time earning profits in a low interest rate environment, and rates have been near historical lows. Energy Select Sector SPDR® ETF (ticker: XLE), a popular ETF that tracks the energy sector, was down 32.6% in 2020 as low energy demand (due to COVID travel restrictions) came together with high energy supply (largely due to additional capacity from fracking in the US) to keep oil prices low and negatively impact energy company profitability.
Non-US equities prices benefited from the tailwind of a weaker dollar in 2020. Some have pointed to massive increases in the US deficit as a reason for the recent slide in the dollar. Some say declining US interest rates have had an impact. Others blame expectations of upcoming dollar inflation.
Long term bonds had a remarkable year. I first heard the phrase “Lower for longer” in a PIMCO article in 2014 that suggested interest rates may surprise investors and remain low for a long time. They have been correct and bond prices are still adjusting as more and more investors have come to expect the same thing (bond prices go up when interest coupons are fixed and prevailing rates and/or the expectations for future rates go down).
The chart below sorts asset class total returns by year. If you follow any individual asset class from left to right through time, you can see that they tend to “mean revert” - that is, outperforming years are typically followed by underperforming years. By investing in a Diversified portfolio (the purple blocks), you can smooth out your investment experience. The Diversified portfolio below is a hypothetical 60% equity and 40% bond mix of the other asset classes.
During the last 94 years (using Ibbotson’s asset class research that goes back to 1926), large cap US stocks have posted a negative return roughly one fourth of the time. In the 13 year review below, we have two negative years; 2008 and 2018. We may be due for another negative year soon, but trying to time markets can be a fool’s game and result in missing out on strong momentum related gains. As our clients know, we recommend staying invested for the long term.
Data as of 12/31/2020 and sourced on 1/10/2021. Details for this chart can be found in the Disclosures below.
Disclosures
Opinions expressed are as of the current date; such opinions are subject to change without notice. Huckstep Asset Management shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. This commentary is for informational purposes only. The information, data, analyses, and opinions presented herein do not constitute investment advice, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Please note that references to specific securities or other investment options within this piece should not be considered an offer (as defined by the Securities and Exchange Act) to purchase or sell that specific investment. Performance data shown represents past performance. Past performance does not guarantee future results. All investments involve risk, including the loss of principal. There can be no assurance that any financial strategy will be successful. Morningstar Investment Management does not guarantee that the results of their advice, recommendations or objectives of a strategy will be achieved. This commentary contains certain forward-looking statements. We may use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason. Investment management and financial advice offered by Huckstep Asset Management is intended for citizens or legal residents of the United States or its territories. Investing in securities involves risks, including but not limited to; currency risk, political risk, geographic risk, concentration risk, custody risk, asset class risk, management risk, market risk, operational risk, passive investment risk, securities lending risk, tracking error risk, tax risk, valuation risk, and infectious illness risk. Investing in emerging markets may increase these risks. Emerging markets are countries with relatively young stock and bond markets. Typically, emerging-markets investments have the potential for losses and gains larger than those of developed-market investments. A debt security refers to money borrowed that must be repaid that has a fixed amount, a maturity date(s), and usually a specific rate of interest. Some debt securities are discounted in the original purchase price. Examples of debt securities are treasury bills, bonds and commercial paper. The borrower pays interest for the use of the money and pays the principal amount on a specified date. High yield bonds typically carry higher risk of default, with historically higher returns than investment grade bonds. The indexes noted are unmanaged and cannot be directly invested in. Individual index performance is provided as a reference only. Since indexes and/or composition levels may change over time, actual return and risk characteristics may be higher or lower than those presented. Although index performance data is gathered from reliable sources, Huckstep Asset Management cannot guarantee the accuracy, completeness or reliability of this data. The following information relates to the Asset Class / Year table on Page 2 of this writeup - Large US stocks are represented by the S&P 500 index. Small US stocks are represented by the Russell 2000 index. International stocks are represented by the MSCI EAFE index. Emerging Market stocks are represented by the MSCI EM index. Long Term Treasury bonds are represented by the BBgBarc Long Term US Treasury index. Intermediate bonds are represented by the BBgBarc US Agg Bond index. 3 Month T-bills are represented by the ICE BofA US 3M Trsy Bill index. The Diversified Portfolio is calculated as a 60% equity and 40% bond portfolio of the previously listed indexes with respective weights of 33%, 7%, 14%, 6%, 8%, 6%, 25%, and 1%.