Nicolet Wealth Management Market Update.
Thank you for your continued confidence in Nicolet. The global COVID-19 pandemic has dominated nearly all of 2020. Yet remarkably, the capital markets were not only able to function, but were able to generate attractive returns for investors. However, investors had to accept a higher level of volatility and uncertainty than anyone expected at the beginning of the year.
Throughout 2020, investors witnessed many market “firsts” and records. Before the COVID-19 pandemic effectively ended the longest running bull market in history (03/09-02/20), the S&P 500 equity market index, which includes nearly all of the largest publicly traded stocks in the U.S., closed at an all-time high over a dozen times in early 2020. In stark contrast, the S&P 500 next experienced the steepest and quickest bear market ever with a 34% peak-to-trough decline in only 23 trading days. Economic data was also bleak earlier in the year with the April employment report showing a loss of more than 20 million jobs, by far the worst one-month loss ever. Additionally, the second quarter GDP report showed that the U.S. economy contracted by a worst-ever 33% annualized rate.
In response to the hardship caused by the COVID-19 pandemic, in late March, Washington passed the largest economic relief package in history called the CARES Act. Subsequently, the unprecedented size and scope of fiscal stimulus, as well as aggressive Federal Reserve interventions helped the markets find a bottom and start a rebound. In less than five months, the equity market experienced the fastest recovery from a bear market bottom to a new all-time high.
Ultimately, the equity market ended the year 2020, as it began, closing at record all-time highs finishing the year up over 18%. However, as the year came to a close an important change in market leadership took place. Recall that through the summer, but before the vaccine news, the S&P 500 was up over 8% YTD. The gains in the market were largely driven by five large technology companies (FAAMG) that comprise nearly 25% of the market, yet were responsible for over 90% of the gains. In contrast, over the final four months of the year those same five large technology companies generated a small loss. Yet over that same time period, the S&P 500 was able to appreciate by another 7%, driven this time by the remaining 495 companies in the S&P trading up over 10%.
Source: Bloomberg. S&P 500 Index. FAAMG (Facebook Inc., Apple Inc., Amazon.com Inc., Microsoft Corp., & Alphabet Inc.)
As COVID induced social distancing measures only benefited a select group of companies, a successful vaccine rollout should benefit a much wider group of companies. As an example, the Russell 2000 equity market index, which measures the performance of approximately 2,000 small companies, has appreciated by over 25% over the course of the final four months of 2020.
The initial outlook for 2021 remains mixed. Reasons for optimism include low interest rates, continued stimulus, strong housing market, and expected strong economic growth. However, our optimism is tempered by concerns over elevated asset valuations, disappointing vaccine rollout progress, geopolitical risk, social unrest, and concerns around COVID variant strains.
Nicolet Wealth Management continues to maintain a disciplined long-term approach and is prepared for a range of potential outcomes. If you would like to discuss your investments or financial plan in more detail, please contact us at your convenience.
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Nicolet Wealth Management is a brand name that refers to Nicolet National Bank and certain of its departments and affiliates that provide investment advisory, trust, retirement planning and insurance services.
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