Executive Summary
- Stock market surges to end a tumultuous 2020
- Diversified investors benefited from particular strength in small companies and foreign stocks
- Mortgage rates fall to record lows as housing prices hit all-time highs
- Michigan’s unemployment rate ticks up, but a new round of stimulus, improving COVID numbers, and vaccine roll-outs could bolster economic conditions in the months ahead
The Rally Continues
Stocks ended 2020 with a bang as the S&P 500 gained nearly 4% while the Dow Jones Industrial Average rallied past 30,000 for a 3.3% advance. Tech stocks once again performed very well, with the NASDAQ 100 rising 5% for the month. The big winner during the final two months of 2020 was the small-cap index; the Russell 2000 climbed almost 9% last month to finish at its highest monthly value of all-time.
December Returns
Ho-Ho-Ho
December is one of the best months from a historical point of view. The final two weeks of the year usually see gains, culminating with what is affectionally known as the “Santa Claus Rally” – a period of equity market strength during the last 5 trading days of the year through the first two trading days of the new year. Often, the market anticipates new money being put to work in January, so stocks rally in advance. What’s more, there can be ‘tax-loss selling’ in December as investors look to take advantage of the capital loss deduction. Those stocks sometimes bounce back in early January. LPL Research notes that a strong Santa Claus Rally often portends more gains during the balance of January and for the year.
Santa Claus Rally (LPL Research)
International Equities Surge
Outside of the USA, foreign stocks performed even better. International developed markets gained more than 5% and Emerging Market stocks added 6%. The US Dollar Index dropped to its lowest value since April 2018. A weaker Greenback is bullish for non-USA stocks, all else equal. Many pundits are trying to figure out why the USD is in such a lull – could it be the massive stimulus measures taken by Congress in addition to the huge monetary bazooka the Federal Reserve has taken to the fixed income markets?? It’s during periods of US Dollar weakness when it pays to hold a globally diversified portfolio.
US Dollar Falls 2.3% while International Stocks Outperform
Interest Rates Remain Low Relative to History
It was all quiet on the interest rate front. The 10-year US Treasury rate ranged from 0.89% to 0.97% last month. A benefit for homeowners, the Freddie Mac average fixed rate for a 15-year and 30-year loan dipped to fresh all-time lows at 2.17% and 2.67%, respectively.
What’s fascinating is that Treasury interest rates actually bottomed in the springtime, then moved higher through the end of the year, but mortgage rates kept falling. How’s that possible? It all has to do with banks’ willingness to lend money. When banks are confident you and I will repay our mortgage on time, the ‘spread’ between the Treasury rate and the average mortgage rate will be closer. Back in March and April, banks were very nervous about defaults. Not so anymore. Thus, mortgage rates continue to move lower creating perhaps the best time in history to take out a home loan.
Freddie Mac Average Mortgage Rates
Millennials Drive Housing Prices Higher
The flip side to super-low home borrowing rates is that housing prices are on fire across the nation as young workers continue to settle down in suburban areas. That’s great news for homeowners, but not ideal for those looking to buy. Millennials are the largest generation by population in the USA, and they are just now hitting their prime household-formation years. COVID-19 only accelerated the trend of the cohort buying-up houses in the burbs. The supply of homes for sale is also quite low by historical standards. It’s a trifecta of low interest rates, strong secular demand growth, and low supply that is driving up home prices.
US National Home Price Index (Charlie Bilello)
Population Breakdown by Generation (Bank of America Global Research)
Your Situation & Finances
Turning away from the stock market and macroeconomy, we want to be sure we talk about issues closely related to you. Decisions you make matter the most. 2020 was a tough year for all of us, but it was a great year in terms of market returns. Many of our clients who were able to weather the COVID storm ended last year on a high note with regards to their net worth. It may sound trite take a moment to appreciate an improved financial situation amid a pandemic, but achieving your financial goals is what we are here for. Household net worth jumped to a new record high during Q3. The 4th quarter figure will certainly see yet another increase considering how housing prices and the stock market performed recently. We encourage all of our clients to be bold with long-term savings goals this year. Look to increase your 401(k) contribution and max-out your IRA. Your future self will thank you.
Household Net Worth (JP Morgan)
It’s not all roses for everyone though. The Michigan unemployment rate ticked up to 6.9% for the November reading – we’ll get the December figure later this month. It was the first monthly increase in the rate since April as our economy continues to struggle to regain its footing. Many families are struggling to keep up with day-to-day expenses. November and December were brutal months regarding COVID-19 in the Wolverine State – new restrictions had to be enacted by state officials. Partial lockdowns come at a social and economic cost as we all know too well.
The good news? Michigan showed rapid improvement in new daily COVID cases during the final days of the month when compared to the rest of the nation. What’s more, Congress passed another stimulus bill that will give a boost to families and businesses in our area. Finally, vaccines are being rolled out. 28% of allocated shots have been administered in Michigan already according to the CDC. So there’s good reason to be optimistic as we kick off the new year.
COVID-19 Daily New Cases – Michigan Improves (Wall Street Journal)
The Point
It’s easy to get bogged down by the headlines these days. Remember that the news media exists to sell advertisements – they are not trying to help you make the best financial decisions. One of the best traits for long-term investors is to put the blinders on and simply stick to your plan. Easier said than done!
We are here to guide you on that journey and navigate through the unexpected events that are sure to occur. Be thankful if you made it through 2020 relatively unscathed. If you were among the tens of millions of Americans who were personally negatively affected by the pandemic, the good news is that the new year brings a fresh start. If you were able to endure 2020, you can make it through anything.
Please reach out with concerns you have. We hope you enjoyed the holidays with family and are ready to begin what can be a great year of recovery for us all! Thank you for your trust and relationship.