Fourth quarter 2020 capital markets outlook

February 2021


  • December capped off one of the most unusual periods in modern history. Despite a global pandemic and widespread economic shutdowns, 2020 proved to be rewarding for nearly all risk-seeking investors. With monthly gains of roughly 3-9% for most equity markets, the full calendar year saw equity returns generally in the 10-40% range (with considerable variation based on market cap, style, and region).
  • With unprecedented monetary stimulus, traditional safe haven assets (e.g., US Treasury bonds) also produced strong returns during 2020, although their performance during December and Q4 were generally flat to marginally negative.
  • Despite some catch-up over the quarter, there continues to be a high degree of divergence among equity regions/styles/capitalizations, and this is exemplified at the extremes with US large cap growth stocks outperforming US small cap value stocks by over 33% in 2020.
  • The US Treasury yield curve saw longer-term yields tick up over the month, with the 10-year yield approaching 1.0% for the first time since March 2020 (it has since increased above 1.10%). As a reminder, with yields at historically low levels, even marginal moves can cause noteworthy changes to bond prices.
  • Real yields in the US declined during December. Shorter-term TIPS saw yields decline by roughly 20-30 basis points whereas longer-term yields (e.g., 10+ years) experienced more modest declines of approximately 2-15 basis points. The entire real yield curve continues to remain in negative territory.
  • Q3 GDP and other economic data indicated that an economic recovery was well underway. However, recent increases in COVID-related cases/deaths, recent payroll/unemployment data, and increased shutdowns across the globe represent headwinds to the recovery.
  • While the markets do appear as though they are looking past COVID (largely due to successful vaccine development), the next several months are projected to be challenging from an economic standpoint as cases are expected to increase and the widespread distribution of the vaccine will not be immediate. Returning to pre-COVID levels of economic activity is not expected to occur until mid-2021 at the earliest.
  • As the US government prepares to enter a new administration, investors will be examining guidance and action as it relates to monetary and fiscal policy, with a particular focus on individual stimulus, taxation, and broad infrastructure spending.
  • Implied equity market volatility was relatively stable throughout December as it hovered just above the long-term historical average (~20) for the entire month. While our Systemic Risk measure declined during the month, implied fixed income volatility did increase.
  • With strong price appreciation for nearly all risk-oriented asset classes in 2020, coupled with imperfect information regarding corporate earnings and solvencies, investors should remain cautious as they examine traditional valuation metrics across the global capital markets.
  • The Market Sentiment Indicator remained green (i.e., positive) at month-end.