Monthly Market Update for December 2020

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Please find the next blog in our monthly series that provides a review of the prior month’s market data, the state of the economy, and the global financial markets.

Global Economy:

Global equity markets had another positive month as the Pfizer and Moderna vaccines began to be administered around the globe. Markets received additional encouragement when the US Congress passed a second stimulus totaling $900 billion at the end of December. However, the latest virus surge continues to threaten economic momentum, leading to new lockdowns and weaker job growth. Optimism was further tempered as the vaccine rollout is so far proving slower than hoped in most countries, highlighting the logistical challenges that exist. The discovery of a new, more easily transmissible virus variant also threatens to complicate the road to recovery. Despite these difficulties, expectations remain high that the virus will be brought under control in the coming year.

The Federal Open Market Committee met in December but did not change policy rates, a widely expected outcome. The December meeting focused on asset purchases, with changes to the statement noting the Fed would continue to buy at least $120 billion of bonds each month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” After expanding rapidly early in the pandemic, growth of the Fed balance sheet has slowed in recent months as strained financial conditions have eased, rising to $7.3 trillion by the end of December.

The third estimate of 3Q-20 real GDP indicated the US GDP expanded at a record rate of +33.4% annualized, a moderate improvement from the initial and second estimates. The upward revision in the third estimate primarily reflected increases to personal consumption expenditures and nonresidential fixed investment. Analysts are expecting more moderate growth for 4Q-20, with estimates ranging from +1% to +9% annualized.

There have been more than 73 million initial unemployment claims filed since mid-March. Weekly initial claims ticked upward in December and there were 140,000 jobs lost in the month as unemployment remained at 6.7%, the first decline in jobs since April. Employment in Leisure & Hospitality was by far the biggest decline as new virus restrictions limited these businesses. Core CPI held steady at +1.6% year-over-year, while the FOMC’s preferred measure, Core PCE, remained steady at +1.4% year-over-year through November.

Global Markets:

Returns for all major equity indices were positive in December as markets continued to respond positively to vaccine news as well as additional stimulus from Congress. The S&P 500, which represents large US-based entities, returned +3.8% for the month. Financials (+6.1%) and IT (+5.7%) were the top performers in a month where all sectors had positive returns. Utilities (+0.4%) and Real Estate (+0.9%) were the laggards with the only <+1% returns. Small cap stocks, as represented by the Russell 2000, was the top performing broad equity index at +8.7%. As in large caps, sector performance was positive across the board, with Energy (+14.4%), Materials (+12.1%), and IT (+11.8%) leading and the rest in the +4.0% to +8.0% range. Growth outperformed Value across the market cap spectrum.

In the broad international developed markets, the MSCI EAFE index gained +4.7% for the month. Performance was broad-based with all sectors and nearly all countries positive for the month. Materials (+8.8%) and IT (+7.4%) were the best performers, while Health Care (+1.9%) was the laggard and the only sector to return <+3%. Among developed countries, Austria (+12.5%), Portugal (+10.6), and Israel (+8.8%) were the top performers, with New Zealand (-0.2%) the laggard and most others generally in the +2.0% to +7.0% range.

Emerging market stocks, as represented by the MSCI Emerging Markets index, outperformed their large cap developed market counterparts at +7.4%. Columbia (+24.8%) and Turkey (+20.4%) were the best performers in the month. Despite strong YTD returns for the index, most EM countries were negative for the year. Positive returns from South Korea, Taiwan, India and China (~75% of the index combined) contributed most of this YTD performance.

Real estate, as measured by the FTSE EPRA/NAREIT Developed index, performed in-line with most equities with a +3.6% return. The energy-related Alerian MLP was positive but continued to trail other equities at +2.5%. The near-month NYMEX oil also rallied (+7.0%) but remains off by -20.5% for the trailing 1-year. Gold also had a strong month at +6.7%, climbing to +24.4% on the year. The diversified Bloomberg Commodity index climbed +5.0 but was down -3.1% on the year.

US Treasury yields were higher across longer-dated maturities and the curve steepened. Vaccine-related optimism pushed yields higher, as did prospects of additional fiscal spending and higher inflation. Intra-month, the 10-year US Treasury reached its highest level since March, nearly topping the 100 bps threshold. Given this backdrop, the overall UST complex was negative for the month at -0.2%, with calendar year 2020 returns still at an impressive +8.0%. Sovereign yields outside of the US were mostly lower, and the global stock of negative yielding debt increased to $17.8 trillion.

The BloomBar US Aggregate Bond index outperformed risk-free US Treasuries on both an absolute and duration-matched basis as credit spreads closed the month tighter. The benchmark gained only +0.1% in December, but the 12-month performance of +7.5% remains impressive given prevailing yield levels. IG corporate issuance was down from November but remained high. Full-year issuance of $1.7 trillion is a new record by $0.4 trillion. Investor demand was strong and spreads narrowed by 8 bps, approaching the year’s low which occurred at the beginning of 2020. With moderately tighter spreads across most categories, the benchmark’s yield-to-worst fell 3 bps to just 1.12%.

The BloomBar 1-15-Year Municipal index outperformed US Treasuries, returning +0.5% in December. Issuance remained strong in the month and yields ground slightly lower, pushing Muni/Treasury ratios down along most parts of the curve to their lowest levels of 2020. While stimulus aimed at helping local governments appears off the table for now, the anticipated economic recovery made possible by vaccinations should boost tax returns and help cash-strapped municipalities rebound.

The BloomBar US Corporate High Yield index returned +1.9% for the month, directionally consistent with higher-risk equities. Benchmark spreads tightened 52 bps with supply slowing ahead of the holidays. All-in yields continued their recent decline and are now at 4.18%. Default rates are forecast to end the year just above 5%, a level not seen since 2009. Bank loans and emerging market bonds tracked other risk-assets with strong performance in the month.

Disclaimers:

The views expressed herein are those of Asset Consulting Group (ACG). They are subject to change at any time. This report was prepared by ACG for you at your request. Although the information presented herein has been obtained from and is based upon sources ACG believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. Accordingly, ACG does not itself endorse or guarantee, and does not itself assume liability whatsoever for, the accuracy or reliability of any third party data or the financial information contained herein. Certain information herein constitutes forward-looking statements, which can be identified by the use of terms such as “may”, “will”, “expect”, “anticipate”, “project”, “estimate”, or any variations thereof. As a result of various uncertainties and actual events, including those discussed herein, actual results or performance of a particular investment strategy may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making investment decisions. ACG has no duty to update or amend such forward-looking statements. The information presented herein is for informational purposes only and is not intended as an offer to sell or the solicitation of an offer to purchase a security.

Please be aware that there are inherent limitations to all financial models, including Monte Carlo Simulations. Monte Carlo Simulations are a tool used to analyze a range of possible outcomes and assist in making educated asset allocation decisions. Monte Carlo Simulations cannot predict the future or eliminate investment risk. The output of the Monte Carlo Simulation is based on ACG’s capital market assumptions that are derived from proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Capital market assumptions based on other models or different estimates may yield different results. ACG expressly disclaims any responsibility for (i) the accuracy of the simulated probability distributions or the assumptions used in deriving the probability distributions, (ii) any errors or omissions in computing or disseminating the probability distributions and (iii) and any reliance on or uses to which the probability distributions are put. The projections or other information generated by ACG regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Judgments and approximations are a necessary and integral part of constructing projected returns. Any estimate of what could have been an investment strategy’s performance is likely to differ from what the strategy would actually have yielded had it been in existence during the relevant period. The source and use of data and the arithmetic operations used for calculating projected returns may be incorrect, inappropriate, flawed or otherwise deficient.

Past performance is not indicative of future results. Given the inherent volatility of the securities markets, you should not assume that your investments will experience returns comparable to those shown in the analysis contained in this report. For example, market and economic conditions may change in the future producing materially different results than those shown included in the analysis contained in this report. Any comparison to an index is for comparative purposes only. An investment cannot be made directly into an index. Indices are unmanaged and do not reflect the deduction of advisory fees. This report is distributed with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters. No assurance can be given that the investment objectives described herein will be achieved and investment results may vary substantially on a quarterly, annual or other periodic basis. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is an Investment Adviser.

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