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GW&K Domestic Equity Strategies Investment Commentary – 4Q 2020

The expression, or some would say the curse, “May You Live in Interesting Times” certainly applied to 2020. The COVID-19 pandemic surely wreaked havoc with economies around the world, but thanks to an aggressive monetary response, several rounds of fiscal stimulus, and heroic work on vaccine development, stock markets have generally looked through the pandemic in anticipation of a return to growth in 2021 and beyond. While the recent surge in COVID-19 cases has surely slowed progress this winter, especially in the U.S. and Europe, it has not been enough to diminish the optimism.

The U.S. stock market, as measured by the S&P 500 Index, reflected this optimism, hitting an all-time high on the last day of the year. The fourth quarter gain of +12.2% capped off a stunning recovery from the March lows, resulting in a full-year gain of +18.4%. All market sectors posted gains for the quarter, especially the more economically sensitive sectors, led by Energy’s +28% recovery and only slightly less robust gains by Financials, Industrials and Materials. More defensive Real Estate, Consumer Staples and Utilities sectors lagged, while still posting reasonable mid single-digit returns. For the full year, however, the biggest gains were still registered by the mega-cap heavy Information Technology, Consumer Discretionary and Communication Services sectors. And despite Energy’s fourth quarter rally, it was still down by over –33% for the year. With interest rates at record lows, the interest-rate sensitive Real Estate and Financials sectors also posted losses for the year.

The Russell 2000 Index of U.S. small cap stocks, had an even more schizophrenic ride. After the first quarter’s record –33% decline, the Index rallied strongly to post a record advance of +31.4% for the fourth quarter, and end the year with a gain of +20.0%. While the same economically sensitive sectors were among the quarter’s leaders in small cap, they were joined by Information Technology. All five sectors reported gains of +32% or more. For the year, the winning sectors also mirrored large caps, with one important addition, the leading performance by the biotech-heavy Health Care sector, up +42%.

Small cap’s record-setting fourth quarter performance also capped a stunning reversal of fortune versus large caps. The quarter’s +19% difference was more than sufficient to push small cap performance ahead of large by about +1.5% for the full year. While the more economically sensitive Value style was clearly in favor in the fourth quarter, it was by no means sufficient to close the performance gap versus Growth for the full year.

In reviewing our comments from prior quarters, we are struck by the number of concerns raised during this unprecedented year, spanning all categories: social, economic and (geo)political. While there is no need to repeat them here, ultimately none impacted the upward trajectory of the market. But per usual, things are not all rosy. Once the new administration is in place, we suspect markets may refocus on some of the issues at hand: global trade, relations between China and the developed world’s democracies, Iran, domestic strife, large fiscal deficits, etc.

Nonetheless, fiscal stimulus plus dovish monetary policy are successfully getting us across the current COVID-19 induced economic chasm. Indeed, the Democratic control of Congress makes it likely that even more fiscal stimulus is just around the corner. The successful vaccination program greatly increases the likelihood of solid economic growth in 2021 and beyond once the pandemic is behind us. Our confidence is high that the economy will return to solid footing as the pandemic comes to an end, hopefully around mid-year. Pent-up demand should drive solid consumer spending, especially in areas related to travel and leisure. And industrial demand should improve as well, as supply chain issues are resolved and inventories are restocked.

Lastly, our hearts go out to all who have struggled or lost loved ones in this pandemic. While we turn our knowledge and analysis into numbers and ratios and buys and sells, we acknowledge that the real world is measured in very different and personal terms. We sincerely wish for a return to normalcy for us all in 2021.

This represents the views and opinions of GW&K Investment Management and does not constitute investment advice, nor should it be considered predictive of any future market performance. Data is from what we believe to be reliable sources, but it cannot be guaranteed. Opinions expressed are subject to change. Past performance is not indicative of future results.


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