Developed Markets Finish the Year Strong
In the month of December, international developed stock markets rose by 4.55%. The UK and Pacific ex Japan recorded returns of 5.46% and 5.28%, respectively. The U.S. and Canada lagged the broader market. 2020 returns were primarily positive except in the UK. The U.S. market finished the year leading developed market returns rising 20.73% while international developed markets in the aggregate were up 7.59%. Financial markets were boosted by positive developments on COVID-19 vaccines. Multiple vaccines are now approved for use and are currently being distributed and administered.
Emerging Markets Surge in December
Broader emerging markets posted a 6.15% return for the month after an 8% return in November. Korea and Brazil recorded returns of 16.55% and 13.60%, respectively. China and Mexico lagged other markets in December. The broader emerging markets returned 15.12% in 2020. China and Korea were primarily responsible for this performance, recording a 2020 return of 29.49% and 44.64%, respectively. The implementation and enforcement of proper COVID-19 safety measures has helped many Asian countries increase business activity since March, resulting in outsized stock market performance.
Information Technology and Materials Outperform
Information technology and materials recorded returns of 7% and 6.55%, respectively, in December. Utilities and industrials lagged other sectors. Information technology companies finished the year up 43.94% with the bulk of those returns coming in the first two quarters, but their ten year dominance coupled with high valuation multiples may signal future underperformance. Defensive sectors such as materials and telecommunications are strongly positive for the year. The energy sector bounced back in the second half of the year, but still finished in the red.
Value Rebounds Strongly
In December, value rallied in the large-cap space and small-cap space to finish the year with positive returns. Momentum recorded a gain of 3.50%. Relative valuations between value stocks and growth stocks are still near historical highs based on many different valuation metrics, but value-oriented companies were boosted by positive COVID-19 vaccine developments. Growth stocks have held up much better than more economically-sensitive value stocks this year, but their future earnings may not justify the higher valuations.
Small-Cap Stocks Rally in Foreign Markets
In the international developed markets, value underperformed growth in the large-cap space and small-cap space. Momentum recorded a gain of 5.51% while small-cap emerging market stocks posted a return of 8.07% this month after returning 13% in November. Foreign value companies were flat in 2020. Foreign momentum strategies have performed well in the short-term and over the past ten years.
Interest Rates to Remain Low
In December, the three-month Treasury bill index returned 0.01% for the month. Interest rates on Treasury bills and money market funds are close to 0%. The Federal Reserve indicated they will keep interest rates at current levels until inflation picks up, which may take years. Savers may face low rates for a long period of time, which will negatively impact retirees and people close to retirement. Real yields, meaning yields adjusted for inflation, are in negative territory. This means cash sitting in money market funds or savings accounts are losing purchasing power. The CPI decreased by -0.80% through November.
Fixed Income Positive in 2020
The returns of deflationary hedges were mostly positive for the month. Long-term government bonds returned -1.16% in December but finished the year up 17.55%. The Bloomberg Barclays U.S. Agg Bond Index returned 0.14% in December. Apart from longer duration assets, investment grade corporate bonds had a strong year, returning 9.89%. However, the real yields on the investment-grade corporate bond universe are now close to 0%.
Energy Investments Struggle in 2020, But Rally into the Second Half
Inflation-sensitive investment returns were mostly positive for the month. Gold bullion and the WTI crude oil were up 7.09% and 6.51%, respectively. A warmer December caused natural gas prices to drop approximately -13% for the month. Domestic and foreign REITs finished the year down approximately -11% in 2020. Gold bullion and gold miners finished the year strongly positive, each returning over 20% in 2020. Continued large fiscal deficits, debt levels, and easy monetary policy may benefit gold in the coming year.
U.S. Dollar Depreciating
Over the past three months, the U.S. dollar depreciated against most other major currencies. In 2020, the U.S. dollar depreciated against the Euro, Swiss Franc, and the Australian dollar the most. The US dollar appreciated against the Mexican Peso and Indian Rupee. The continuation of large U.S. fiscal deficits may weigh on the U.S. dollar in the medium-term to long-term.
Brandon Yee, CFA, CAIA – Research Analyst
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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