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Current State of the Stock Market
By Ryan Bayonnet
Investing in 2020 caused a wild swing of emotions for the average investor. The feeling of riding a roller coaster is an appropriate one to describe what many investors felt during the year. The S&P 500 (the most common measure of U.S. Large Cap Stock performance) experienced more than 40 daily swings of 2% or more, the most we have seen since the Great Financial Crisis of 2008-2009.
It's important to note that the stock market is not the economy. Even with high unemployment levels and economic challenges due to COVID-19, the major stock indexes (Dow, S&P 500, Nasdaq) each hit new highs in 2020 and finished well above where they started the year. Stock markets do not necessarily represent the present but make estimates about what the future is expected to look like.
Thanks to the combination of reduced spending during the crisis and incomes that have been augmented by the stimulus, many people have an increased amount of money to spend. The Federal Reserve stated that households have $2.2 trillion more in cash than at the beginning of 2020.
U.S. Large-Cap Stocks
Over the last twelve months, the combined revenue of the five largest U.S. technology companies grew by 20%, to $1.1 trillion. Their total profit rose at an even faster 24%. The combined market capitalization of these five companies grew by 50% over the past year to a staggering $8 trillion. The top-performer was the information technology sector, up 43.89%. Many of these companies benefited from increased work from home and subsequent business expenditure of technology. The worst showing came from the energy sector, down 33.68%. The energy industry suffered from lower demand needs due to reduced personal and business travel.
Speaking of the S&P 500, Tesla became the largest company added to the S&P 500 when it was in December. It is already the 6th largest company in the S&P 500.
U.S. Small-Cap Stocks
While large-cap stocks dominated the headlines in 2020 (e.g., Microsoft, Amazon, Apple, Facebook, Google, Netflix), small-cap stocks as represented by the Russell 2000 index jumped 20% outperforming the S&P 500 which gained 18.4%. This was a turnaround from earlier in the year when small-cap stocks were harder hit by the economic shutdown. With views that the economy will rebound in 2021, small-cap stocks would appear poised to do well.
Like U.S. equities, global equities performed well in 2020 with developed market stocks up 10.65% (MSCI World (ex-US)), and emerging market stocks up 18.31% (MSCI Emerging Markets). One reason for positive global equity returns has been the declining dollar. A declining dollar benefits global stock market companies held by U.S. investors. Those who own global stocks are subject to currency fluctuations, so if the dollar falls, your global stocks will be worth more once they’re converted to U.S. Dollars.
Looking forward to 2021, investors will be using many metrics to predict how markets will perform. The passing of additional fiscal stimulus in Congress, COVID-19 vaccine rollout, interest rates, and corporate earnings will heavily influence how markets perform moving forward!
Indices Source: Bloomberg