Market Currents

• A Surprisingly Good Year. Defying expectations, 2020 turned out to be a rewarding year for equity markets and most other financial assets.  Significant monetary and fiscal policy support, combined with the reopening of the economy, drove an impressive v-shaped recovery from the sharpest and shortest recession on record.  Stocks closed out the year with solid gains, with the S&P 500 climbing 16.3%, ending the year at a record high.  Strength was seen across most asset classes, from small-caps to emerging economies, and even the fixed income markets.

• President Biden. Capping several contentious weeks following the November 3^rd election, Joe Biden was inaugurated as the nation’s 46^th President on January 20^th. The new Administration has tackled several policy areas, led by an ambitious $1.9 trillion Covid relief package.  Its ultimate fate is uncertain in a closely-divided Congress, but in general, we expect the Administration to advance relatively large-scale spending and investments to jump-start the economy and support households and small businesses hurt by the virus.

• The Covid Winter. The pandemic continues to weigh on growth in the near term, even as we welcome the positive news of vaccine development.  In the US, hospitalizations are now above their mid-year levels, and Covid-related deaths remain near record highs.  Multiple states and localities have been forced to reinstitute restrictions on activities and in-person gatherings, while trying to avoid blanket shutdowns and the economic harm that accompanies them.

• Vaccine Development. Progress against the virus has lifted optimism and has helped to beat back uncertainty.  We have made significant strides in vaccine development, with two formulations approved and in use here in the US, and more expected to be on the way.  We have also learned to treat the ill more effectively.  The successful and timely deployment of vaccines will help to anchor our expectations on quelling the pandemic, and be a key driver of the recovery’s pace in 2021.

• Rising Treasury Yields. US Treasuries are seeing an increase in yields among longer-dated bonds.  The likelihood, in some form, for a large, debt-financed stimulus package is driving inflation expectations higher.  Higher rates would ultimately provide competition for investment dollars, and make it more costly for companies and individuals to borrow.  For now, rates remain low enough to not pose a significant threat to stock prices.  We continue to monitor developments in this important market.

• Portfolio Construction. Going into 2021, we expect the haze of uncertainty wrought by Covid-19 and US politics to lift a bit.  The backdrop of weak-but-improving growth and ample liquidity should help to support risk assets.  The current recession more closely resembles a disruption temporary in nature, such as from a natural disaster, rather than a traditional business cycle slowdown.  Depending on the successful and timely deployment of vaccines, we are hopeful that a fresh economic cycle can commence, which should translate into meaningful growth catalysts for the global economy.

Christopher Lai

Senior Portfolio Manager

01/25/2021