Last year was one of the strangest years that I can ever remember from a market perspective. Stocks started 2020 reasonably well but then the pandemic hit. The global economy was put into lockdown to keep medical systems from being overwhelmed. The S&P 500 fell 34% in just 22 days and the volatility index went to all-time highs. Government responses were massive. In this country, Congress passed an unprecedented $2.2 trillion stimulus package and the Federal Reserve quickly dropped interest rates to zero and expanded its balance sheet by over $2 trillion to support the economy and the financial system.
As a result of the enormous government actions, global markets recovered and actually produced very good annual results in 2020. In this United States the Dow Jones Industrial Average was up 9.7% and the S&P 500 was up 18.4%. The S&P 500 is a market capitalization weighted index and if you remove the five largest stocks (Microsoft, Apple, Amazon, Alphabet and Facebook) the index was up 9%. The S&P 500 Growth Index was up 33.5% and the S&P 500 Value Index was up a mere 1.4%.
International stock markets also recovered from their pandemic shutdown lows to end the year with healthy gains. The MSCI EAFE (Europe Australasia Far East) Index was up 8.4%, the MSCI Emerging Markets Index was up 18.5% and the MSCI China was the star up 29.7%.
The global economy is still soft and being supported by fiscal stimulus and monetary policy. In this country Congress passed a second relief package valued at $900 billion. An additional package will likely be enacted once the new administration takes office. These should get us through until vaccines are widely available and the economy can normalize.
There are concerns that President Biden along with Democratically controlled Congress will increase corporate taxes to pay for their proposed new programs. Higher corporate taxes, in isolation, would reduce corporate profits and stocks prices. Given the current weak state of the economy, however, this would not seem like a 2021 action, but it cannot be ruled out.
Fiscal spending and pent-up demand are projected to lead to 6% GDP growth and 20% growth in corporate profits this year. As it stands now, 2021 S&P 500 consensus earnings are $168, and this estimate has been increasing. It is possible that an increase in corporate taxes, should this occur, could be offset by lower corporate interest expenses in the current very low interest rate environment.
The S&P 500 ended 2020 at 3,756 which works out to 22.3 times projected earnings. This is well ahead of the 5-year average of 17.5 and the 10-year average of 15.7 but not unreasonable given that the yield on the 10-year U.S. Treasury Bond ended 2020 at 0.91%. Earnings are projected to grow to $195, up 16% in 2022. After two very strong years for U.S. stocks the market could produce modest gains in 2021 even with some limited multiple compression.
Wishing everyone a very Happy, Healthy and Prosperous New Year!