MARKetS REPORT – 2020 4th Quarter

Dear client,

2020 was a year none of us will soon forget...even though most of us would sure like to.  Financially speaking, the year started strongly, with equity markets at all-time highs and unemployment near record lows. But by mid-March, a new coronavirus had reached North America after emerging overseas in late 2019. As you well know, governments around the world abruptly shuttered their economies and issued shelter-in-place orders in an effort to slow the spread of the disease – resulting in sharp and drastic declines across major stock indexes globally.

As the first wave of COVID-19 infections began to slow over the second and third quarters of the year, markets then staged an impressive recovery. This was particularly true in the U.S. where the S&P 500 Index (which holds the top 500 companies in the U.S. by market cap size, and is considered a broad representation of the U.S. equity market) regained all of its losses by mid-August – the fastest rebound on record.

Despite a resurgence of COVID-19 cases and renewed lockdowns in many regions, markets trended upward during the fourth quarter of 2020, boosted by growing clarity around the outcome of the U.S. presidential election and significant COVID-19 vaccine progress. With the rollout out of approved vaccines across many developed countries including in Canada, the U.S. and the U.K., the global outlook for an economic recovery is improving, although there will undoubtedly be some volatility along the way.

Capital markets in the fourth quarter

The S&P 500 Index experienced a pullback due to uncertainty in the days leading up to the U.S. election in early November but soared in the weeks that followed.  Breakthroughs in vaccine development gave investors confidence in a 2021 economic reopening.  Cyclical sectors with more leverage to the economic cycle (energy and financials) delivered the strongest performance in the 4th quarter.  The S&P 500 Index was up 7.1% for the fourth quarter and up 16.1% for the entire year 2020 in Canadian-dollar terms.  The MSCI World Index, which reflects returns for developed equity markets around the globe, was up 9.0% for the quarter and 13.6% for the entire year.  The European Union and U.K. struck a post-Brexit trade deal just before the end of the year, spurring the U.K. stock market higher.  Emerging markets surged higher supported by broad access to vaccines, global economic re-acceleration hopes, and a weaker U.S. dollar.   Japanese equities delivered the strongest returns on vaccine news as the local equity market has the most exposure to out-of-favour sectors.

The Canadian economy was boosted by stronger demand for energy and higher oil prices in the fourth quarter, along with the approval of Pfizer’s COVID-19 vaccine for use here. While the S&P/TSX Composite Index has moved upward since its pandemic-induced low in March, the Canadian benchmark has yet to return to the record level reached in February. The index posted a gain of 9.5% for the quarter and finished up 5.6% for 2020. In 2020, Canadian equity returns came primarily from the technology and materials (precious metals) sectors.  

Although energy and real estate had a strong Q4, it was not enough to pull them from negative territory for the entire year.  Oil finished the quarter at $48.52 per barrel (WTI $US) which was down 22.11% for the year 2020.  Gold rallied upward, to close on the year at $1898.67 $US / oz. 

Interest rates remained unchanged in Canada, the U.S. and Europe during the final three-month period of the year. In December, the Bank of Canada held its benchmark interest rate steady at 0.25% after cutting rates in March in response to the COVID-19 pandemic. The Bank of Canada reiterated it will continue to buy Government of Canada bonds at a rate of about $4 billion per week to keep downward pressure on interest rates, and restated that it would keep the benchmark lending rate near zero until sometime in 2023. The U.S. Federal Reserve maintained its target for the federal funds rate at a range of 0% to 0.25%. The European Central Bank held interest rates on its main refinancing operations, marginal lending facility and key deposit rate at 0.00%, 0.25% and -0.50%, respectively and also expanded its monetary stimulus program.

Looking back

The events of 2020 have shown us how unpredictable markets, and life in general, can be. At the beginning of the year, no one could have predicted a global pandemic unfolding, or that markets would plummet only to recover in record time. 

I have had some very good and long conversations with clients and family over the past year.  Your resilience, courage and compassion are to be commended, especially the health care and front line workers keeping us fed and healthy. And although it seems like the end of the world, please remember that many of us have survived worse.  2020 marked the 80 year anniversary of both the invasion of the Netherlands by Nazi Germany and the Battle of Britain (the air war fought by the RAF and the Luftwaffe).  My mother-in-law, Beryl, born and living just outside of London, England, survived bombing raids and V2 rocket attacks throughout World War II.  My step-mother Helen survived a Nazi attack and occupation of Holland for 5 years.  She also reminded me that she missed 2 years of school as a teenager and still became a pharmacist!!  So be strong, and stay safe…at least we don’t have Nazi bombs falling on us!

What can we expect now?

Looking ahead, the pandemic will continue to impact markets in the coming months as vaccine distribution and inoculation continues to expand. Accommodative fiscal and monetary policies from central banks around the world are also expected to continue for some time.  Low interest rates should help businesses, consumers and the stock markets to advance forward.

One of the best ways to protect your portfolio from the unexpected is diversification. We have worked together to broadly diversify your investments and ensure that all of your eggs aren’t in one basket. It’s also important to stay invested. Those that sold their investments after markets plummeted in March would have locked in losses while those that stayed invested would likely have been rewarded for their patience when markets recovered later in the year.

Reminders

March 1, 2021 is the deadline for RRSP contributions for 2020 tax year.  Please check your Notice of Assessment sent by the CRA for the amount that you can contribute to your or your spouse’s RRSP. And a new year has brought a new maximum TFSA contribution amount of $6,000 if you are a resident of Canada and over the age of 18.  Let’s try to keep as much money in our pockets and out of the CRA.  I am sure that they will be asking not-so-politely for some more income taxes in the future.

I would like to wish you and your family a happy and healthy new year. I would also like to thank to you for your continued trust in me and for the opportunity to assist you in working toward your financial goals.  My team and I are here to help. Should you have any questions regarding your portfolio, or wish to set up an appointment to review, please do not hesitate to contact my office.