CIO Outlook: Strength and Resilience in 2020 Leads to Optimism in 2021

The market showed strength and resilience in the face of unprecedented events, hitting all-time record highs in December.  With promising vaccines, historically low interest rates, and strong fundamentals, I remain optimistic about the outlook for equities as we head into 2021.

December 2020
  • Neil J. Hennessy
    Neil J. Hennessy
    Chief Investment Officer and Portfolio Manager

As a new year and new decade dawned in January, no one could have imagined that the world would quickly plunge into one of the worst health crises in our history. The year was defined by this global pandemic and the ensuing economic shutdowns, and a highly charged presidential election. Yet, the stock market, while volatile, has continued to show its resiliency and strength, as the major indices hit new all-time highs in November and again in December.

At mid-December and as we look toward the end of 2020, U.S. equities have posted positive performance this year, but there were extreme differences in how various sectors performed during the period. For instance, the technology-focused NASDAQ Composite Index performed strongly, returning 25.33% through 11/30/20, whereas the Energy sector (as represented by the S&P 500® Energy Sector Index) struggled with a loss of -19.73% for the 11-month period. The Financials sector also performed relatively poorly during the period, with the Russell Financials Indices significantly lagging the overall market. In addition, large-cap stocks have significantly outperformed small caps thus far in 2020, and growth stocks have reigned over value stocks during the period. Moreover, approximately half of the NASDAQ’s return thus far in 2020 was comprised of just three behemoth technology stocks—Apple, Microsoft, and Amazon.

Optimism about the approval and distribution of effective COVID-19 vaccines appears to be buoying investor confidence. Low interest rates have also provided a tailwind to equity prices. In my opinion, stocks are trading at reasonable valuations given this low interest rate environment. The U.S. economy looks to be on the road to recovery and is experiencing moderate inflation, and our banking industry appears healthy. The unemployment rate is dropping, albeit slowly, and I expect it to continue to improve once businesses reopen. Cash on corporate balance sheets remains at very high levels, which could support rising dividends and stock buybacks as we move into the new year.

I believe our corporate business leaders will continue to adapt and find ways to drive growth and value for their shareholders, but I also feel that the uncertainty created by the continued health crisis and the stalemate over fiscal relief will lead to additional bouts of market volatility. While certain sectors, styles, or stocks may be in or out of favor at any particular time, equities overall offer comparatively attractive returns at a time when interest rates are near-zero. The expectation that rates will remain low for the foreseeable future is a reason to be optimistic about the outlook for stocks heading into 2021. I still see a lot of value in the markets and strong opportunities throughout, and I remain confident that equities can and will thrive in the long run.

I have often said that investing success comes from time in the market, not timing the market. Over my 40 years in this business, there have been 33 where the market had positive returns, on average over 18% annually, and only 7 years with negative returns, with an average loss of 9%. While 2020 has been unprecedented in so many ways, I encourage investors to try and put it into perspective and maintain a long-term view of investing and power of the markets.