Strong returns across asset classes in the fourth quarter capped off a truly unique year.
The fourth quarter alone was marked by a contentious U.S. presidential election, continued vaccine developments, more fiscal stimulus and some long-awaited Brexit clarity. The number of historic events that occurred in 2020 seem like they can sum up a decade or more. It’s hard to believe that a mere twelve months can be packed with so many events that have impacted everyday life.
Both equity and fixed income markets ended the year in positive territory after experiencing robust returns in the fourth quarter. The S&P 500, representing U.S. large-cap stocks, finished the year up 18.4%, recovering from its intra-year low of -30.4% reached on March 23.1 The Bloomberg Barclays Aggregate Bond Index, representing investment-grade U.S. bonds, finished the year up 7.5%.
A protracted U.S. presidential election did not deter markets during the fourth quarter, though political policy uncertainty remains with a divided Senate. Markets have historically been resilient through various presidential administrations and political environments.
Perhaps the most significant catalyst for the markets during the quarter was the positive COVID-19 vaccine developments. In December, the U.S. Food and Drug Administration authorized Pfizer’s and Moderna’s COVID-19 vaccines for widespread use, though health authorities expect there won’t be enough supply to vaccinate the U.S. general public until spring or summer of 2021.2 Many believe that the vaccine is essential to stop the spread of the virus and allow the economy to return to pre-pandemic levels.
Congress also passed a $900 billion fiscal stimulus bill that was signed into law at the end of December. The package includes assistance for businesses, households and schools, as well as funding for COVID-19 testing and vaccine distribution.3
Lastly, over four years after the 2016 British referendum to exit the European Union, the U.K. and EU struck a trade deal on Thursday, December 24, just days before a year-end deadline. The deal fundamentally calmed fears about economic disruption that may have occurred under a “no-deal Brexit” scenario.4
While many economic risks remain and uncertainty is still elevated, especially relating to COVID-19 and the path forward for the global economy, investors should not be deterred from concentrating on their long-term goals and focusing on what they can control. Although volatility is certainly uncomfortable, it is a normal part of the investing journey, even in such an abnormal year.
Fourth quarter returns
Stock performance across the globe
U.S. large-cap stocks, represented by the S&P 500, gained 12.1% in the fourth quarter and finished the year up 18.4%. Within the large-cap segment, value stocks (Russell 1000 Value Index, 16.2%) outperformed growth stocks (Russell 1000 Growth Index, 11.4%) for the quarter.
Small-cap stocks, represented by the Russell 2000 Index, advanced 31.4% in the fourth quarter and gained 20.0% for the year, outperforming U.S. large-cap stocks in both time periods and reversing considerable relative underperformace in the first quarter. Within small-caps, value stocks (Russell 2000 Value, 33.4%) also outperformed growth stocks (Russell 2000 Growth Index, 29.6%) during the fourth quarter.
On the developed international front, the MSCI EAFE Index increased 11.3% in local currency terms and finished up 16.0% in U.S. dollar terms for the quarter. A weakening U.S. dollar relative to international currencies boosted returns for U.S. investors in international markets. Developed international stocks finished the year up 7.8%.
Emerging-markets stocks posted solid returns during the fourth quarter as well. The MSCI Emerging Market Index was up 16.0% in local currency terms and 19.7% in U.S. dollar terms. Some of the best-performing emerging-market countries during the quarter were Colombia, Hungary, South Korea and Brazil. Emerging-markets stocks gained 18.3% for the year.
Bond performance across the globe
Although the fourth quarter was marked by a continued risk-on environment, the bond market exhibited positive performance. As corporate and high-yield bond credit spreads narrowed for the third consecutive quarter, the lower quality segments of the bond market outperformed the higher quality segments in the fourth quarter.5
At the December meeting, the Federal Open Markets Committee (FOMC) reiterated its intention to keep the federal funds rate near the zero-lower bound until roughly 2023 or later.6 Thus, yields at the short end of the U.S. yield curve slightly decreased and remained at low levels during the fourth quarter. Yields at the long end of the U.S. yield curve increased during the quarter, as the 30-year nominal treasury bond yield rose 0.19% to finish at 1.65%. Therefore, the U.S. yield curve steepened during the fourth quarter. For the year, treasury yields finished lower across the curve, resulting in strong returns for treasuries in 2020. Keep in mind that bond prices rise as yields fall.
The Bloomberg Barclays Aggregate Index, representing investment-grade U.S. bonds, advanced 0.7% for the fourth quarter and 7.5% for the year. Municipal bonds, represented by the Bloomberg Barclays Municipal 1–10Y Index, posted a 1.0% gain for the quarter and 4.2% gain for the year.
As for the riskier segments of the bond market, emerging-market debt prices increased during the fourth quarter. The JPM EMBI Global Diversified TR Index, representing bonds denominated in U.S. dollars issued by emerging-market governments, returned 5.8% for the quarter and 5.3% for the year. High-yield bonds, represented by ICE BofAML BB-B US CP HY Index, finished up 5.7% for the quarter and 6.3% for the year.
Remaining resolute in the face of adversity
As we discussed in our 2020: A year in review piece, we acknowlege that maintaining discipline and perspective can be tremendously trying in the midst of such an unparelleled year. When looking back in history for guidance on how to maintain discipline and focus in the face of events that have never been experienced before, it’s key to recognize that markets continue to reward long-term investors through all sorts of economic cycles and external crises.
Even though the pandemic-triggered uncertainty cast upon the economy will not disappear with a new calendar year, maintaining a long-term perspective and sticking to a well-constructed investment plan helps position investors for success in their financial journey.
U.S. Stock Market: Russell 3000 Index
International Developed Stocks: MSCI EAFE NR Index
Emerging Markets Stocks: MSCI EM NR Index
U.S. Bond Market: Bloomberg Barclays Aggregate Index
Emerging Markets Bonds: JPM EMBI Global Diversified TR Index
Large Cap U.S. Stocks: S&P 500 Index
Small Cap U.S. Stocks: Russell 2000 Index
Int-Term Municipal Bonds: BBgBarc Municipal 1-10Y Blend 1-12Y Index
High Yield U.S. Bonds: ICE BofA BB-B US CP HY Constrained Index
Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Wipfli Financial from sources Wipfli Financial deems reliable, but has not been independently verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged. It is not possible to invest directly into an index. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.
Source: ©  Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.