The Economy and Market from Here... at Hills Quarter 1 2021

The Economy and Market from Here... at Hills Quarter 1 2021

January 6, 2021

Tagged As: Wealth Management

2020 was a year that defied expectations. At the start of the year, few if any, could have predicted what would transpire. The world experienced a global pandemic that impacted individuals and businesses alike, and some tragically. But among the struggle and loss was an unprecedented response from governments and scientists which likely averted outcomes that could have been far worse. As a result, economies and markets recovered far more quickly than could have been envisioned just six months ago. Here at Hills we are both humbled by the experience and grateful to the many that have served on the front line keeping our societies functioning and people safe.

COVID-19 and the progression through the pandemic remain top of mind for investors. The first momentous steps have been taken towards developing a safe and effective vaccine for the virus. Two vaccines have been approved by national regulatory agencies and 15 other vaccines are in large-scale final stages of testing, including three that may soon also receive approval. How efficiently these vaccines can be manufactured, distributed, and accepted by the population remains uncertain. Despite the remaining uncertainty, stock markets rallied on the news. During the quarter the S&P 500 added 12.14% which resulted in an annual return for 2020 of 18.39%. Similarly, small companies and international stocks also recorded gains for the quarter: 31.36% for the Russell 2000, a common small company index, and 16.09% for the MSCI-EAFE Index, a widely used index for developed international markets. Both asset classes were positive for the year, returning 19.93% for the Russell 2000 and 8.39% for the MSCI EAFE.

The news of additional stimulus contributed to the stock market rally. Congress has passed, and the President has signed, an aid package for Americans and small businesses. This will bring back the extra federal unemployment benefits and provide a one-time $600 payment to millions of Americans. Most notable are the Payroll Protection Program benefits, which include another $285 billion for small businesses and $92 billion for colleges and schools for childcare assistance and facility maintenance.

Interest rates remain low and will likely stay that way for some time. The Federal Open Market Committee (FOMC) held its final meeting of 2020 and maintained the federal funds target range of 0.00%–0.25%. Additionally, the FOMC committed to purchasing U.S. Treasuries and agency mortgage-backed securities in the amount of at least $80 billion and $40 billion per month, respectively. Essentially, the FOMC feels further progress needs to be made toward its inflation and employment goals. By partaking in this asset purchase program, the Federal Reserve (Fed) is able to maintain low interest rates in longer-term credit and encourage borrowing and capital investment. However, the Fed’s growth forecasts were revised up for 2021-2022, reflecting prospects for a robust recovery and potential tapering of the asset purchase program in the future.

Looking ahead
We remain cautiously optimistic as we enter 2021. COVID-19 remains the primary concern. Record infections, hospitalizations, and deaths have been reported in recent weeks. Economic reports have shown signs of stress recently as weekly jobless filings and business closures have risen. In the longer-term, mass distribution of COVID-19 vaccines will bring a drop in infections and deaths and further drive economic recovery, especially in the travel and hospitality sectors that have been badly impacted. Though, in the short-term, much hinges on government stimulus and the FOMC’s commitment to long-term monetary support. We anticipate a tapering of the asset-purchase program to begin when the economy normalizes, which would result in the steepening of the yield curve. These conditions could propel stocks forward, which often benefit from a steeper yield curve and an improving growth and inflation outlook.

As we look out to the next several quarters, increased use of vaccines could restore a level of confidence and security not seen since the beginning of the pandemic. That likely would invite greater spending by consumers and a consequent pickup in corporate earnings. However, the market largely expects this outcome and it may already be reflected in current prices – and perhaps may be slightly overly optimistic. However, with interest rates at record lows and likely to stay that way for the foreseeable future, there are few alternatives. Therefore, we remain risk neutral, maintaining equity positions at the strategic mid-point. As always, we continue to stay diligent and poised to act on behalf of those we serve.

We are here to answer your questions and make sure your current asset allocation is still appropriate for your circumstances. If it has been a while since you have visited with us, please do not hesitate to call or email and set up a meeting with your Hills Bank Trust and Wealth Management Officer.

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