Macroeconomic View & Markets
What a difference a year makes. In February of 2020, we were talking about the end of the longest bull market in history, only to move into the fastest bear market in history. The S&P 500 was down more than 20% in 21 trading days, coupled with unprecedented market volatility. There were daily swings in the S&P 500 of over 5% and weekly swings of over 10%. However, little did anyone know that the market would bottom on March 23, 2020 and come roaring back with the help of fiscal stimulus and an extremely accommodative monetary policy from the Fed, reflected in the 1-year returns. Of course, these returns are not typical and likely will not be repeated for quite some time.
In bonds, high yield corporates led in all periods, while aggregate bonds were the worst performing year-to-date. Cash continues to be the worst-performing in all other periods. Keep in mind, we invest almost exclusively in diversified bond funds that do not own just one category of bonds but a variety of bonds including corporates, municipals, government, and securitized. Even though bonds had a rough quarter, over the long run, they help dampen market volatility, and we believe that all portfolios should have an allocation to bonds.
Small-cap U.S. stocks led for the quarter, 1, and 5-years, while large-cap U.S. stocks led in all other periods. Large-cap U.S. stocks were one of the worst-performing stock categories year-to-date, which is a significant change in leadership as large-cap U.S. stocks had been leading all equity categories for quite some time. In fact, mid-cap and small-cap stocks outperformed large in 12-months and 5-years. Real estate and foreign equity continue to be the laggards, with foreign equity being the worst performer year-to-date, 3, 10, and 15-years. However, they were up over 34% and 44% respectively the past 12-months.
The global economy has been reopening for almost a year. As a result, the economic data has been improving after bottoming out during the second quarter of 2020. As of March 2021, the unemployment rate dropped to 6.0% after peaking at 14.7% in April of 2020. Still, newly unemployed workers filed 719,000 initial jobless claims the week ending March 27th, near their lowest levels since the beginning of the pandemic. Continuing claims are trending down but were still at 3.79 million after peaking at 25 million in late May 2020.
The Fourth Quarter Gross Domestic Product or GDP grew at an annual pace of 4.1%. The 2020 GDP shrank 3.5%, the largest decline since 1946. These data points have improved significantly over the last 12-months from the depths of the pandemic. Even though the economy has improved significantly, it has a long way to go until it's back to pre-pandemic levels. A full recovery will take years, not months.
The vaccine rollout has been instrumental in improving economic data. As the rollout becomes more robust, the economic recovery is following that trend. On January 1st, the average daily doses administered in the U.S. were less than 300K and 1 million globally. Over the past seven days, the average daily doses in the U.S. were more than 3 million and 16 million globally.
Approximately 30% of the U.S. population is fully vaccinated. An expeditious global vaccine rollout is crucial to getting back to some semblance of normalcy. However, many segments of the economy, mainly services including travel and leisure, will not be back to pre-pandemic levels until we reach herd immunity when approximately 70% of the U.S. population is vaccinated.
The returns over the past 12-months are certainly not typical but speak to the importance of being in the market instead of timing the market. Of course, the returns over the next 12-months will not be nearly as good as the last 12 that are measured from a very low (-30% from mid-February highs) starting point. The downturn last year has shown again how a diversified portfolio that matches your risk tolerance continues to be the key to building long-term wealth and achieving your long-term goals.