The Cornerstone Investment Commentary: 4th Quarter 2020
Welcome (finally) to 2021! In a year that truly defied description – financially, as well as in so many other ways – it turned out that the most successful investment results were achieved by sticking to ‘the basics’.
First, when 2019 ended with global stocks markets at very high valuations, given interest rates back then (and no pandemic in sight), ‘the basics’ meant a slight reduction to your equity allocation as 2020 began.
Then, when the pandemic’s onslaught sent both stock and corporate bond markets plummeting farther than at any time since the 2008-09 Great Recession, ‘the basics’ meant rebalancing to add to your equity holdings at vastly-reduced prices in anticipation of an eventual recovery. This included favoring U.S. over foreign stocks given the aggressive actions by the Federal Reserve and the new CARES Act. It also meant choosing the safety of U.S. Government bonds to protect the rest of your portfolio as we awaited this.
Next, ‘the basics’ meant keeping U.S. equity holdings diversified between large and small company (both growth and value stocks) since we would never try to predict how or when the economic recovery would breathe life into these asset classes. Sure enough, virtually all the recovery through September was fueled by U.S. and foreign growth stocks, while value stocks lagged. Then, roles switched in the 4th quarter with U.S. small-cap (+31% gains), U.S. large-cap value (+16%) and foreign stocks (+17%) outpacing U.S. large-cap growth stocks (+ ‘just’ 11%). For all of 2020, the global equity index rose 17%, and we saw most of our actively-managed holdings (those with five-letter symbols) significantly outperform their benchmarks.
Finally, ‘the basics’ meant periodically rebalancing the equity portion of your portfolio back down to what we believe are appropriate levels given today’s very low interest rates (which can allow for greater stock market appreciation than would otherwise be true). This is where things stand entering 2021.
Taken together, these strategies and steps generated 2020 returns that were 2% – 5% higher than ‘merely’ holding course (and not selling anything last Spring) during the year. Portfolios with higher allocations to stocks and which hold more in actively-managed funds experienced the higher end of this range.
Looking ahead, with vaccines rolling out and a new CARES Act 2.0, we are optimistic that economic recovery will continue to benefit U.S. value stocks and foreign holdings; you now hold more of these than at mid-year. As for bonds, continuing to position most in shorter-term fixed income holdings seems wise since the timing of market-based interest rate increases cannot be predicted. That said, we will consider adding high-grade corporate bonds back to the mix as the recovery strengthens. And we have no serious concerns about inflation since it’s hard for that to ‘kick up’ with unemployment still over 6%. (Recall that in 2019, with unemployment at just 3.5%, inflation was only 2.3%.)
Of course, we will be watching how markets react to all the various economic events that unfold this year. With all wishes for a healthy and safe 2021, thank you for the continuing opportunity to work with you.