Q4 2020 Market Review

Q4 2020 Market Review

Performance Review | KayneCast 136

January 8, 2021

A Year for the History Books

A significant drawdown and a robust recovery in less than six months? If 2020 didn’t prove to investors that timing the stock market is a futile game, it’s hard to imagine what would.

Vaccines Were a Strong Shot in the Arm

At the onset of the COVID crisis, the stock market saw a clear division between companies that benefited from shelter-in-place and work-from-home environments — web-based shopping platforms, entertainment streaming services, and web-based conference calling services — and those that were hard hit — airlines, cruise lines, and hotels. But once positive vaccine news started to reach us in early November and the uncertainty that accompanies every national election started to abate, travel and retail companies staged strong recoveries.

The fourth quarter showed strong performance virtually across the board — with advances in the S&P 500 Index, small stocks as measured by the Russell 2000 Index (best quarter ever), growth stocks and value stocks, international developed markets, emerging markets, high yield fixed-income and emerging market debt, even municipal bonds. There’s nothing like good news in a year of unimaginable challenges to bring the bulls out for a run.

2021 Stock Market Outlook — How Long and How Fast Will Those Bulls Run?

The market has been looking past COVID into a (hopefully) more normal future. In our view, it seems reasonable to assume that more people will dine out, cruise, and fly once they feel safe. Simultaneously, we also believe the digital transformation that boosted other stocks seems more of an inevitable evolution of our world than a temporary bandage. The critical question for 2021 is how much of this good news was already priced in during 2020.

The answer isn’t simple. Clearly, some of it was, but it would be unusual if all of it has already been covered. We believe corporate earnings will continue to recover and grow over the next several years, and interest rates will rise somewhat but not excessively. Equity returns will likely remain positive but moderated in 2021 and 2022. However, it would be unwise to rule our corrections as the current falling-in-love investor sentiment settles into more mature marital contentment. And don’t forget that those early days of infatuation can be volatile. We haven’t conquered COVID quite yet.

Long-term Mindset Remains the Best Policy

We believe developing a long-term strategic plan with a diversified portfolio and staying with it is the best policy. At KAR, we will continue to seek out high-quality businesses that can sustain their competitive position in good and bad times. This is the investment approach we believe can lead to positive investor outcomes over the long term.

This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of publication of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein.