2020 was a year fraught with challenges virtually unmatched in living memory, including a global pandemic, a chaotic U.S. presidential election, and the increasingly devastating effects of a changing climate. Although some of these challenges persist and many of us still have valid worries, it is crucial that investors keep tabs on their portfolios and financial plan to ensure that current and future challenges are not made even worse by personal financial instability. On the bright side, 2020 ended up being a year of spectacular returns for investors who held firm during an enormous Q1 selloff in the early stages of the pandemic in the U.S.
At SigFig, we have not wavered in our perspective that the most critical decision an investor makes and periodically reevaluates is their time horizon, or the approximate time between the present and the estimated start of spending events (e.g. retirement). Once a time horizon has been set, questions around asset allocation can be answered using tried and tested theories regarding globally diversified portfolios and individual investor risk.
That said, in order to avoid making costly mistakes it’s a good idea for investors to have an up-to-date understanding of major events and trends that influence markets. Here, we’ll summarize some recent developments that might be important for investors to keep tabs on.
There is no greater source of near-term market uncertainty than the direction that COVID-19 containment will take around the world. As of the beginning of January, new daily cases are near all-time highs.1 As the country makes its way through winter, businesses large and small continue to struggle with limitations and shutdowns. Many business owners worry that the pandemic might shut their doors for good, many others have already taken that painful step. The most recent (November 2020) statistics from the Department of Labor show that seasonally-adjusted unemployment rate in the U.S. is 6.7%, down from its peak in April at 14.7% but substantially higher than the pre-pandemic/February level of 3.2%.2
Despite the multitude of economic challenges faced by the broader U.S. economy, domestic stock markets boomed after an enormous Q1 sell off during the early days of the U.S.’ pandemic. In particular, technology companies posted enormous gains as investors bet that such companies would be well-positioned to succeed in an increasingly digital world. Large and small companies experienced gains with notable differences, however, with small and mid-cap companies sinking deeper than their larger peers during Q1 followed by a dramatic Q4 acceleration. To illustrate, consider the performance of three U.S. equity indices/benchmarks during 2020 (Figure 1):
Figure 1: Daily YTD performance of the S&P 500 (red), NASDAQ composite (blue), and Wilshire 4500 Completion (black) indices, based on market close prices.3
While all three indices posted gains for 2020 despite losing significant value during the COVID-fueled Q1 selloff, the journey of each was distinct. Consider the YTD returns of the three aforementioned indices at key points in 2020.
| Index | YTD Return (%) on Feb 19th | YTD Return (%) on March 23rd | Total 2020 Return (%) | | ------------------------ | -------------------------- | ---------------------------- | --------------------- | | S&P 500 | +4.8 | -30.7 | +16.3 | | NASDAQ Comp. | +9.4 | -23.5 | +43.6 | | Wilshire 4500 Completion | +5.2 | -38.6 | +30.0 |
The S&P 500 experienced the most muted (yet still astonishing) response as it rose from its Q1 low to posting solid full-year gain. Boosted by a late-year acceleration in early November, the Wilshire 4500 beat out the S&P 500 for the year despite having sunk deepest of the three benchmarks in Q1. In a year of outstanding growth, however, it was the tech-heavy NASDAQ that led the pack by climbing from it’s more modest Q1 low to a jaw-dropping gain of 43.6%. It’s safe to say that 2020 was quite the year for U.S. stocks.
Developed international markets also posted positive movement in 2020 (see Figure 2). Overall, the iShares Core MSCI EAFE-indexed ETF (IEFA), which aims to represent large and mid-cap companies across developed markets outside of the U.S. and Canada, started the year moving downward and experienced a Q1 fallout that bottomed at a YTD loss of 33.6% in late March. Developed international markets rallied through the final three quarters of the year and finished in the green in 2020, despite nationwide lockdowns in European countries with significant exposure in IEFA (as of early January 2021), including the United Kingdom (~14.5% exposure), France (~9.5%), and Germany (~8.5%). Japan (~26% exposure within IEFA) kept the spread of COVID-19 under control during most of 2020, although the impact of the virus on the Japanese economy has been similar to other developed countries. Fourth quarter GDP data for Japan has not yet been published, but in Q2 the Japanese economy shrunk by 6.4% (28.1% annualized rate) and rebounded in Q3 with a real growth rate of 5.3% (22.9% annualized).4 The Nikkei 225 (N225), an index tracking large-cap Japanese companies across a wide range of industries, posted a +16% return for 2020.
Figure 2: Daily YTD performance of IEFA (red) and IEMG (blue), based on dividend-adjusted market close prices.5
The landscape is markedly different in emerging market economies, although through the first six months of 2020 international developed and emerging market equity markets followed an almost identical pattern (see Figure 2). The iShares Core MSCI Emerging Market-indexed ETF (IEMG), which aims to represent large and mid-cap companies across emerging markets around the world, gained 17.9% in 2020. Compare this to IEFA’s 8.2% 2020 gain and note that at the end of June, both securities were down ~10% YTD. One possible factor driving this phenomena could be increased economic activity and growth in China (~36% exposure within IEMG as of early January 2021). After sweeping lockdowns and massive testing and contact tracing efforts, the Chinese government appears to have gained a strong handle over virus cases and many parts of life in China have gone back to business as usual, but that victory was not without serious economic consequences. After more than a decade of >5% annual GDP growth, China saw GDP shrink by 10% due to the effects of dealing with COVID-19. The economy rebounded in the second and third quarters however, growing by 11.7% and 2.7% respectively.6
Other countries in East Asia that feature prominently in emerging market equity indices such as Taiwan (~13.5%) and South Korea (~14%) also appear to have thus far retained strong control over virus cases, which is good news if economic growth after containment in these countries follows the pattern demonstrated in China. Outside of Asia, emerging market economies such as India, Brazil and Russia continue to struggle with COVID-19. It is important for globally diversified investors to note these countries constitute a smaller portion of cap-weighted emerging market equity indices than the aforementioned Asian nations.
The results of the 2020 U.S. elections have been certified. Come January 20th, Joe Biden will be the 46th President of the United States and Democrats will control both houses of Congress. A recent analysis by the Wall Street Journal revealed that since the election of 1928, there has been effectively no difference in annual S&P 500 returns between periods of divided and single-party government. Every congressional term is different and many other factors will determine the future course of markets. At SigFig, we believe long-term investors should avoid making major changes in their portfolios based on recent election results and should remain focused on your goals and macro-scale financial plan.
Despite bitter partisan divisions and current split control, Congress passed a $900 billion stimulus bill (signed in late December by a reluctant President Trump) aimed to give economic relief to millions of unemployed workers, struggling businesses, and low-income earners. Similar to the CARES Act passed earlier in the year, the latest installment of COVID aid includes a check in the amount of $600 to individual adults with adjusted gross income less than $75,000 (more for couples and additional benefits for dependents). Some unemployment programs established in the CARES Act have been extended, although with reduced benefits. The bill also allocated $285 billion for small business loans via the Paycheck Protection Program (PPP) and makes changes to the program to help address problems of inequitable loan distribution during the first round of the PPP.7 Although not guaranteed (and not yet released), recent reports have indicated that the Biden administration is working on an even bigger stimulus package that could include an increase in the second round of individual payments to $2,000 (up from $600), provide funding for COVID vaccination programs, and send monetary aid to local and state governments whose budgets have been turned upside-down as a result of shrinking tax revenues due to measures intended to fight the spread of the virus such as business closures. Markets have thus far responded positively to signals of COVID-related economic stimulus, but it remains to be seen if that trend will continue.
The statement released by the Federal Open Market Committee after their November meeting indicated that the target range for the federal funds rate will remain between 0 and 0.25% until labor market conditions improve, noting that “economic activity and employment have continued to recover but remain well below their levels at the beginning of the year.” It is possible that such improvements might not be seen for years, so investors can expect low interest rates for the foreseeable future. While low interest rates are welcomed by borrowers, including current and aspiring homeowners, sustained low rates will temper returns on newly acquired positions in bonds and related indices. While bonds remain a relatively steady source of passive income in portfolios that also tend to offset volatility associated with stocks, investors should adjust their expectations of income-driven portfolios as long as the current interest rate environment lasts. That said, such portfolios can still be good choices for some investment situations, such as those with short-horizon goals (0-5 years).
Despite massive government stimulus and historically low interest rates, inflation in the U.S. remains low. Over the 12-month period ending November 2020 the Consumer Price Index (CPI), a proxy for inflation, was up 1.2%,8 which is below the Federal Reserve’s target of 2% annual inflation.9 Low inflation is not a new development in the U.S. considering that annual inflation has been below 2% in five of the previous seven years (except for 2.1% in 2017 and 2.4% in 2018).10 Ideas for why inflation remains low in the U.S. and in many developed countries around the world include the rise of the sharing economy and price reductions stemming from associated efficiency improvements and demographic transition to an older population, evidenced by a negative cross-country correlation between average inflation and the share of a population older than 65.11
The profound changes and problems facing the world can weigh on the minds of beginning and seasoned investors alike. At SigFig, we encourage clients to keep up-to-date on market shifts and routinely evaluate your financial goals, but discourage trying to time the market, especially for long-term investors. If you have questions about your investment options or what asset allocation is appropriate for you based on your goals, take our risk questionnaire. SigFig has financial advisors ready to discuss your unique situation and offers broadly-diversified managed portfolios that can help you on your financial journey. If you’re interested in speaking with a SigFig financial advisor, schedule an appointment today, or become a SigFig managed account customer directly via our website.
 See statistics from the Johns Hopkins Coronavirus Resource Center (https://coronavirus.jhu.edu/data/new-cases).
 “The Employment Situation — November 2020.” Bureau of Labor Statistics. (https://www.bls.gov/news.release/pdf/empsit.pdf).
 GSPC and IXIC data provided by Yahoo! Finance. W4500 data provided by the Wall Street Journal.
 Data from the Ministry of Foreign Affairs of Japan (https://www.mofa.go.jp/policy/economy/japan/index.html)
 Data provided by Yahoo! Finance.
 Source: National Bureau of Statistics of China via Tradingeconomics.com (https://tradingeconomics.com/china/gdp-growth).
 “[Who Got Rescued?](https://www.nytimes.com/2020/12/03/business/dealbook/ppp-loans-data.html)” The New York Times. 3 December 2020.
 U.S. Bureau of Labor Statistics: Consumer Price Index. (https://www.bls.gov/cpi/).
 See “[Statement on Longer-Run Goals and Monetary Policy Strategy](https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htm)” from the Board of Governors of the Federal Reserve System.
 See “[Historical Consumer Price Index for All Urban Consumers (CPI-U)](https://www.bls.gov/cpi/tables/supplemental-files/historical-cpi-u-202011.pdf)” from the Bureau of Labor Statistics.
 Sanchez and Kim (2018). “Why is inflation so low?” Publications of the Federal Reserve Bank of St. Louis.
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