As 2020 draws to an end, one cannot not reflect what an extraordinary year this has been. Despite the exogenous shock of the covid-19 pandemic and the uncertainty that came with it, US equity markets closed the year up by double digits, outperforming European equities strongly. In this unprecedented year, the regional outperformance of the US equity market serves as a stark reminder of the US economy’s resilience.
The positive year-to-date return across the S&P 500 Index, which represents the performance of the largest US listed companies, conceals the unprecedented market swings exhibited throughout the year. As the covid-19 pandemic started to spread from Wuhan in China to Europe, and rapidly across the rest of the world, risky assets experienced the fastest bear market correction in history. Equity market indices during March recorded the largest drop over the past decade and subsequently recorded the highest one-day gains since the 2008 financial crisis. The seesaw effect is represented by the VIX, volatility index, which shot to a high of 82.59, a level above the financial crisis peak.
The speed of recovery from this event-driven bear market was equally high. The S&P 500 rallied to pre-covid-19 levels in just five months, driven primarily by the strong performance across US technology companies. The technology sector benefitted strongly from the accelerated adoption of the digital economy as governments introduced stay-at-home measures that were aimed at containing the spread of covid-19. E-commerce, digital payments, and cloud computing were amongst the winning themes for this year.
More importantly, however, the unprecedent level of stimulus, by government and monetary authorities, set the path for the start of an economic recovery. In the US, the $2.6 trillion worth of fiscal response alone amounted to approximately 12% of the US’s GDP value. The commitment by government and monetary authorities to soften the impact of the covid-19 containment measures boosted the outlook going forward.
Meanwhile, the fourth quarter of the year was characterised by the US Election, the second pandemic wave and covid-19 vaccine discoveries. Over the month, Pfizer and BioNTech, Moderna and Astrazeneca in its joint effort with Oxford University released key safety and efficacy results relating to the three separate phase three trials. Although covid-19 cases continued to rise and lockdowns were reintroduced, the vaccine discovery boosted growth sentiment, particularly raising the prospects of a stronger economic rebound when the lockdowns come to an end. As a result, the vaccine discovery lowered risk premiums and triggered a broader recovery across cyclical companies: energy, industrials and financials particularly.
As we head towards a new year with an optimistic equity market outlook, the recent news of a new and more infectious covid-19 strain in the UK reminds us that speed bumps still remain. The key downside risks to the outlook going forward mainly relate to the vaccination process, senate elections in the US and a possible overshoot of inflation and interest rate expectations. The new covid-19 strain raises the prospects of mutation risks and the uncertainty relating to the effectiveness of the currently developed vaccines. Logistical issues for vaccine distribution and willingness to take the vaccine also raise concerns on the speed at which herd immunity will be achieved. Meanwhile, policy uncertainty in the US is closely dependent on the Georgia Senate election on January 5th while concerns over a spike in inflation and interest expectations may become more relevant if the economic rebound accelerates faster than expected.
This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.
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