Q4 2020 market update
The following Q4 market update provides context for the investment performance of your charitable assets.
From Cambridge Associates, investment advisor
The strong fourth quarter capped off a year of resilient equity performance in the face of extraordinary economic challenges. Global equities have gained 63% from March lows, ending the year with double-digit gains and closing at a new all-time high. The uptick in fourth quarter momentum was driven in large part by major coronavirus vaccine breakthroughs, which helped boost investor confidence despite worsening case counts and new lockdown measures. By year end, several countries had commenced vaccination efforts, but the speed of distribution has faced recent challenges, and the timing and effectiveness of the rollouts remains unclear.
Global policy measures continued to provide a supportive backdrop for risk assets. In December, the U.S. Congress passed a new $900 billion COVID-19 stimulus package after months of intense negotiations. EU governments reached a compromise on a budget and stimulus package, which included €750 billion in pandemic relief ending months of deadlock. Central banks remained steadfast in their accommodative policy support, with the European Central Bank (ECB), the Bank of England (BOE) and the U.S. Federal Reserve all expanding or extending asset purchase programs during the quarter. Political developments featured prominently in fourth quarter. After the U.S. presidential election, investors began to anticipate whether there would be any tax increases or regulatory changes that would negatively impact market returns. Elsewhere, the United Kingdom and EU agreed on a historic Brexit trade deal, four and a half years after Britain voted in the landmark referendum to leave the bloc. Negotiators ironed out final sticking points only days before the United Kingdom officially exited the EU single market.
U.S. equities, as measured by the MSCI U.S. Index, delivered double-digit returns in fourth quarter but trailed developed market stocks outside of the U.S., as measured by the MSCI EAFE Index, in major currency terms. Despite this recent performance rotation, U.S. stocks outperformed by nearly 20 percentage points for the full year. All 11 S&P 500 Index sectors advanced, led by cyclical and value-oriented sectors such as energy and financials; more defensive sectors generally lagged as real estate, consumer staples, and utilities gained the least. Financials received a boost in December after the Fed announced it would allow banks to resume share buybacks. Value outperformed growth for just the third time in the past 16 quarters, while small caps—which posted their strongest quarterly return on record—trounced large caps but still lagged marginally for the full year. Forward 12-month earnings growth expectations have recovered to their highest levels since mid-2010, but strong performance pushed forward price-earnings ratios up to the 95th percentile of observations since the late 1980s.
Global equities excelled; among regions, emerging markets shares outperformed developed counterparts and non-U.S. developed markets outperformed U.S. stocks in major currency terms. Other signs of equity performance rotation emerged as value bested growth and small caps topped large caps. High-yield bonds outperformed investment-grade corporate and sovereign counterparts, as corporate yields touched all-time lows. Most real assets categories advanced, underpinned by stronger commodity prices, while gold was flat. The US dollar weakened, falling to its lowest quarter-end level since 2014.
In this time of economic, geopolitical and market uncertainty, we continue to believe that our diversified investment approach positions the portfolios well. Our focus will continue to be on staying disciplined in our investment process, valuing liquidity, being patient and looking for compelling new investment opportunities. For more information, visit the financials page.