What a wild ride 2020 has been. The past 12 months have been nothing short of a roller coaster, but like all good rides, these markets have ended the year on a high note. In March we endured one of the biggest drops in American history, and now just 9 months later, we are consistently setting all-time highs. Volatility was expected around the very contentious election season, but the continued upside surprised many investors, and the positive trend could not be bucked. One more great lesson in the importance of staying invested. After seeing growth in the second and third quarters, equity markets continued to rally and once again significantly outperformed fixed income. The Dow finished the year up 7.3%, the S&P up 16.3%, and the NASDAQ up an incredible 43.6% to post its best annual performance since 2009. Though the year was tumultuous in many aspects, the Dow, S&P 500, and the NASDAQ combined to set over 100 record closes, the most in any year since 2017. The astounding performance of the technology and communication services sectors were certainly the drivers to begin the year, as growth stocks significantly outpaced value. However, the fourth quarter saw the laggards pick up the ball as the sector rotation began to show its face. 

The fourth quarter brought a reversal of trends with cyclical oriented sectors leading the pack. In Q4 alone, small cap stocks soared as the Russell 2000 index gained over 31%, notching its best performance on record. Value stocks grew at a 16% rate, edging growth which still experienced a 12% uptick. To highlight the scope of success the market has endured, I share a note from BofA: “November was the best month for the Dow since 1987, the best month for the S&P 500 since 1928, the best month ever for the Russell 2000, the best month ever for energy, the best month ever for industrials, and the best month for financials since 2009.” As you will see below, almost every sector participated in this historic year. 

• Led by the recovering manufacturing cycle, industrials rallied off their October lows to finish the quarter up 15.7%. The recent surge in Covid-19 cases may hamper this growth slightly, but as the vaccine and immunity permeate society as planned, we should see the industrials continue to benefit.
• Health Care has shown strength in Q4, rising over 8%. The sector continues to experience strong secular trends, healthy fundamentals, and favorable relative valuations, but they still face slight headwinds in the form of Covid-19 as well as potential political changes.
• Technology and communication services have been the leaders of this charge, advancing over 43% in 2020. Though they still had strong fourth quarter performances, gaining 11.8% and 13.8%, respectively, they were middle of the pack and performed in line with the S&P. Tech and communication services should still benefit in the coming year with more reliance worldwide as the pandemic continues, but it is wishful thinking to expect a repeat performance. 
• Consumer discretionary has also seen a great second half of the year, jumping over 30% as fiscal payments and high savings rates have provided a buffer for the consumer. This trend is expected to continue until we begin to see a more normal environment.
• After a very slow start to the year, financials picked up steam into the last quarter, gaining over 23% in the closing three months. This sector has faced plenty of headwinds given the interest rate environment and will continue to face uncertainties as they deal with regulation and thin net interest margins, but with the prospect for rising rates, new capital return, and technical momentum, there is potential that the surge could continue.
• Energy came roaring back into the close of the year as well, with 96% of energy stocks passing their 200-day moving average, a sign that traditionally bodes well for additional gains over a 6-12 month period. However, the recent virus surge could weigh on demand for crude and the growing move toward alternative fuels provide uncertainty for its long-term performance. Energy still finished the year down over 30%, showing how far out of favor the sector fell.

Ultimately, in the face of significant adversity, the markets managed a record year in many aspects. With government stimulus, central bank support, and the vaccine as main catalysts, there is reason to believe the markets should continue to benefit. Though the outlook remains bullish, it is important to note that there are still plenty of volatility inducing events that could cause some bumps along the way. We are in no way out of the woods with the virus, as mutations and unexpected vaccine delays could hinder progress. However, even after a 65% rally in the S&P since the low on March 23, there is no reason to believe this market has run out of gas. 

We hope everyone enjoyed the holidays and are staying safe, 

John Webb 

Financial Advisor 
Pinnacle Asset Management 
Raymond James Financial Services 
Kidd Private Wealth Group