COMMENTARY FROM THE INVESTMENT COMMITTEE OF CORAL GABLES TRUST COMPANY
Q4 2020 - Seeing the Light
Looking back at the challenges we faced this year as a nation, we have all witnessed acts of kindness, courage, and ingenuity as we swiftly adapted and navigated through these unprecedented times. With multiple vaccines reporting positive and effective late phase trials, November quickly reminded investors what markets could be in a world where COVID-19 is under control. This encouraging news boosted expectations of stronger economic growth for the new year and gave way to a rotation to more cyclical sectors that perform well when the economy is improving. The S&P 500 ended the year at an all-time closing high, returning +18.40% for the year with most of the appreciation occurring in the fourth quarter. The NASDAQ had a phenomenal year returning +43.60%, as big tech and software companies were among the most popular this year. The market's resilience and ability to look past short-term disruptions allowed it to surpass pre-pandemic all-time highs in only six months, but the road to recovery certainly has not been smooth. We believe volatility will continue as there is a tug of war between economic shutdowns and keeping businesses open until the vaccine is successfully administered throughout the world.
On the economic front, the employment data released for the quarter was mixed with the unemployment rate dropping to 6.7% compared to the 8.4% experienced in the third quarter. However, the pace of the recovery has slowed dramatically with just 245,000 jobs added in November. The economy has regained 12.3 million of the astonishing 22.2 million payrolls lost between February and April, with much of the remaining job losses in sectors most affected by the pandemic. A significant recovery in these areas is linked to businesses reopening and has been tied directly to the expected delivery and adoption of the vaccine. Market participants applaud Congress on finally reaching an agreement on the roughly $900 billion coronavirus relief package providing a fresh infusion of aid to households, small businesses, and schools. The pandemic unleashed massive divergences within the real economy and the stock market, but compared to the market's swift recovery, main street will need additional stimulus measures to bridge the gap as hundreds of thousands of restaurants and small businesses remain shuttered.
Across the pond, a second wave of virus infections have moderated any recovery and the region is on track to record negative GDP growth in the fourth quarter. Due to the second wave of lockdown measures, the European Central Bank expanded its massive monetary stimulus program by another $605 billion. This takes the total monetary stimulus provided by the European Central Bank to $3.6 trillion. Despite these concerns, given the foreign developed and emerging markets relative valuation advantage over U.S. equities, we believe they are poised for a strong post-vaccine recovery. History shows that foreign stocks tend to outperform during periods of U.S. dollar weakness which is a trend that is starting to take shape. Additional deficit spending and less desire for dollars are tailwinds for further dollar weakness. This trend bodes well for U.S. investors using foreign investments in a diversified portfolio. The MSCI ACWI ex US index returned +10.65% for the year and the MSCI EAFE index returned +8.28% for the year with notable strong performance in the fourth quarter alone.
With the U.S. treasury yield curve steepening, the fixed income market is anticipating a stronger economy and possibly higher inflation expectations. Meanwhile, short-term interest rates will remain pinned to near zero through 2023 as the Federal Reserve waits to normalize interest rates based on the speed of the recovery. Ultimately, this means that fixed income returns in 2021 will be limited to the coupon income earned on the bonds rather than price appreciation. The 10-year treasury ended the quarter at 0.92%, increasing 24 basis points from the third quarter, but remains down 100 basis points, or 1.00%, for the year. Fixed income investors enjoyed a strong year, as the Barclays Aggregate Bond Index returned +7.51% and foreign bonds ended the year with a +10% return on average.
THOUGHTS ON ASSET ALLOCATION
The well-known adage "time in the market beats timing the market" held true in 2020. Upon a quick glance at how stock markets performed in 2020, one would scarcely know that anything was amiss this year, let alone a once in a century pandemic and a dreadful global recession.
Our Trust Investment Committee thoroughly reviewed our positioning for 2021 and elected to make changes in the domestic mid-cap growth and international growth arena by adding the Blackrock Mid-Cap Growth and Baron International Growth strategies. Both managers have successful track records and consistent investment philosophies. With interest rates remaining low for the foreseeable future, the Committee decided to reduce our allocation to the Merger fund strategy and added a hedged equity strategy to further reduce volatility within our portfolios. Extensive due diligence was performed on these strategies and they possess attributes we look for like a proven investment process, conviction and most importantly emphasis on downside protection.
*Returns are from actual portfolio results. Results may vary. Past performance is no guarantee of future returns.
We look forward to speaking with all of you regarding our views and the performance of your respective portfolios. For additional information or questions please contact Mason Williams, Chief Investment Officer, at 786-497-1214 or Michael Unger, Investment Officer, at 786-292-0310.