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Quarterly Commentary 2020 Year End

Jan 28, 2021

If anyone thought the economic review was mundane, then 2020 should make you reevaluate that point of view. The fourth quarter of 2020 was perhaps THE most interesting quarter in the economy in modern history. It is quite challenging to develop an economic outlook for 2021 given these extraordinary times.  So, let’s start by reviewing the fourth quarter of 2020.

Economic Update

Review of the major aspects of the economy which include employment, consumer confidence, the housing market, corporate profits, as well as disposable personal income, spending, and savings:


The December Employment showed a decrease of 140,000 jobs – this reversed a multi-month trend of job gains. However, it is easily explained by the surge of COVID-19 and related restrictions. There were 372,000 jobs lost in the restaurant and bar industry. Outside of those jobs, the trend toward regaining the jobs lost from March continued. As to not sound too optimistic about the job market picture, it is worth noting that initial claims from unemployment have remained around 800,000 on a weekly basis, which is roughly 4x the normal readings pre-pandemic.

Consumer Confidence

When we look at consumer confidence, we look at both the current conditions and the future expectations. The index dropped in December for the second straight month to a reading of 88.6, which is the lowest reading since August. The big decline came from consumers’ assessment of current labor conditions, which plunged from 105.9 to 90.3.

The Housing Market

Remained really robust although there seemed to have been some cooling off. Prices continue to rise, rates remain low, and supply of houses remains low. That low supply of houses could provide a further boost to the economy in 2021.

Corporate Profits

Exceeded a low bar set in the 3rd quarter with composite S&P profits dropping all of 7% vs a consensus forecast of a 22% decline after the quarter was already over. Consensus forecast for the 4th quarter of 2020 is a decline of 12%. There is an expectation of a strong rebound in corporate profits in 2021. Stay tuned.

Disposable Personal Income/Spending/Savings

The big surprise when looking at this data for 2020 was that disposable personal income INCREASED $1 trillion despite the pandemic. The entirety of this increase came from transfer payments from the Government. A related surprise is that wages only declined modestly despite the normal increase in unemployment. How could this be? The jobs lost were low-paying jobs, whereas high-income earners experienced significant increases in wages and bonuses. That $1 trillion increase in disposable income was saved and not spent. In fact, there was a $500 billion decrease in personal spending. This boils down to a $1.5 trillion increase in savings.  That money ended up in the stock market which helps explain the incredible performance of the stock market during a year with a record surge in unemployment and record decline in corporate profits.

Turning to our best estimates for 2021…

We believe employment will remain challenged for at least the first quarter and perhaps the second quarter depending on the success of the vaccine rollout. Following December’s disappointment, we would not be surprised to see another decrease in total jobs in January. We do believe, however, that in the second half of 2021, job growth will be robust. As such, we expect the unemployment rate, which finished 2020 at 7.45% to decline to around 5%.

Consumer confidence will follow suit. The assessment of current conditions will remain at these depressed levels until the economy is able to reopen and jobs are regained. We like to watch the future expectations component of the index to gauge the level of optimism in the country. Our faith in the American consumer leads us to believe that those future expectations will remain upbeat.

We think housing will be a driver of increased economic activity as the shortage of available homes should spur other activity, like construction. During the housing bubble of 2006-2008, there were as many as 2.2 million annual new housing starts and in 2020, that number got to be as low as 934,000.

As we mentioned earlier, we expect a strong rebound for corporate profits in 2021. But we expect that rebound to be back-end loaded. We think there is risk in the current optimistic estimates of S&P earnings jumping around 23.5% to $168 as higher corporate taxes and perhaps – some inflationary pressures and higher interest costs – could eat into those profits.

We believe the American consumer is eager to spend, particularly on experiences, and expect the savings rate to drop precipitously and, as such, the spending rate to rise dramatically. Once again, the successful distribution of the vaccine and the victory against the Coronavirus are critical to this prediction.

Another important element of this dynamic is the additional fiscal stimulus that has been proposed by President Joe Biden.  

Market Update

The market finished 2020 at record levels with almost a linear relationship between the level of speculation and returns.

NASDAQ was up 47.58%

S&P was up 16.26%

Dow Jones was up 7.25%

And the Russell 2000 was up 18.36%

Interest rates remained subdued with the 10-year Treasury Rate finishing at 0.93%

The first nine months of 2020 favored the Technology, Consumer Discretionary, and Communications sectors, whereas the Energy, Financial, and Materials were the three top performing sectors in the market for Q4.

For the year, we would like to highlight many things. The first is the fact that since November 1st there has been a shift to value stocks. The Russell 2000 Small Cap Index posted its best quarter since 1987. Next, the Dollar finished at its lowest level since 2018 which we think has a myriad of implications for the future. Additionally, a $900 billion fiscal stimulus package was finally passed, and expectations are post-election and post-GA Senate election that there will be an increase of $600 payments to $2,000 payments. Finally, we can’t conclude the overview of the market without commenting that valuations are extremely elevated with the S&P500 trading at close to 29x 2020 earnings.

We think the market in 2021 will be very different than the results experienced in 2020. Most notably, we believe the more economically sensitive value stocks will continue the rebound of the last few months while the mega-cap growth-oriented stocks will produce much more modest returns.

In this economic recovery one could also expect outperformance from the financial sector as well as materials and commodity companies. Small caps should also continue their recent strength as they are historically the best performers in periods of improving economies and rising interest rates.

We don’t want to conclude the forecast without pointing out the enormous amount of uncertainty, more uncertainty than we’ve had in our over 37 years of experience. The impact of the dramatic increase in the national debt, the superior response to COVID-19 from some large Asian nations, and the related relative improvement in those economies are just a couple examples of a long list of potential wild cards and game changers.

Thank you for your continued support and we wish you all a prosperous 2021.

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