Week in Review: January 1, 2021

Markets ended 2020 on a high note, with the S&P 500 closing the holiday-shortened week at a new record high. Other notable indices closing at record highs included the Dow Jones Industrial Average and MSCI World Index. Markets benefitted from President Trump signing into law the $900B coronavirus relief package, which provides needed help to business and individuals, and the $1.4T budget, which avoided a government shutdown and funds the government through the end of its fiscal year in September.

Despite all that occurred during the year, 2020 proved to be very good for investors. After falling by over 30% at the depths of the March selloff, the S&P 500 then staged a remarkable 68% rebound, to end the year up 16.3%. Other asset classes also enjoyed strong returns. Small caps ended the year up 18.4% thanks to a 31% surge in the fourth quarter. International markets also enjoyed positive returns with developed and emerging markets gaining 5.4% and 15.8%, respectively, for the year.

Following such strong gains, coupled with declining earnings, valuations enter 2021 looking rather stretched. However, when viewed through the lens of low inflation and record low interest rates, valuations seem more reasonable. In 2021, we expect earnings growth to exceed price returns, thereby allowing equities to grow into their current valuations.

The recent surge in coronavirus cases, and attendant deaths, continued largely unabated. As of Sunday, US cases had surpassed 20.5M, while deaths surpassed 351K. California became the third state, along with New York and Florida, to exceed 25K coronavirus deaths. In the UK, regulators approved the use of AstraZeneca’s vaccine.  The company believes that it can produce ~3B doses by the end of 2021.