In the first quarter, global equity markets posted a steep decline and bond yields plunged, after steps taken to curtail the spread of COVID-19 shut down large portions of economic activity and created a massive global demand shock. Within weeks of the S&P 500 and S&P/TSX Composite indices touching all-time highs, the benchmarks retreated more than 30%, experiencing some of their largest one-day moves ever along the way. Governments and central banks around the world stepped in with extraordinary actions designed to avoid a freeze-up of credit markets and to support both individuals and businesses. Prices of commodities, including oil, dropped sharply due to demand concerns. Even gold, which is usually considered a haven in turbulent times, was temporarily driven lower by margin calls (investors selling to cover losses in other asset classes) before bouncing higher as the period ended.
In late March, markets reversed course. Through much of the spring and summer, investors shrugged off some of the worst economic data on record and instead focused on progress toward a medical treatment for COVID-19, numerous economic stimulus packages — both fiscal and monetary — and expectations of a recovery as economies reopened from lockdowns. The final months of the year saw sentiment buffeted by rising US-China tensions, the November US presidential election, a virus resurgence and renewed lockdown measures on the one hand, and a wave of hopeful news about vaccine progress on the other hand. By mid-November, optimism about a gradual return to normal activity in mid-2021 had the upper hand and 2020 left the stage on a confident note.
The COVID-19 crisis and the stock market
Stocks ended higher in Canada, the US and Japan, and lower in Hong Kong and most of Europe. Global equity markets all displayed a similar pattern over 2020: a significant decline in the first quarter, followed by recovery over the balance of the year. Despite the similarity, there was a wide range of outcomes across markets. Gains in North American stock indices ranged from a modest +2% for Canada’s S&P/TSX Composite to more than +40% for the technology- and Internet-heavy Nasdaq Composite. The three major US benchmarks — the S&P 500, the Dow Jones Industrial Average and Nasdaq Composite — all rebounded to record highs. For the S&P 500, the bounce back was the quickest on record. However, most major markets in Europe failed to get their heads back above water. Spain, which was one of the countries hardest hit by COVID-19, and the UK, which struggled to come to terms with the European Union on a post-Brexit trade relationship, both finished the year with double-digit losses. Asia was a mixed bag, with Hong Kong lower because of geopolitical tensions, while Japanese stocks rallied to their highest level since early 1991.
As 2020 ended, the TSX sat within 3% of its February high. Technology was the strongest sector by far, lifted by Shopify Inc., a beneficiary of powerful stay-at-home trends. A gain of more than 170% lifted the e-commerce company to more than 60% of the sector weight and made it Canada’s largest company by market capitalization. The materials sector placed a strong but distant second place, as safe-haven flows and record low interest rates lifted gold prices to an all-time high. Energy stocks weighed heaviest on TSX returns. Crude futures prices fell in April into negative territory for the first time ever following a dispute between Russia and Saudi Arabia. The Organization of the Petroleum Exporting Countries (OPEC) and other producers then cut production and raised prices, resulting in a rebound in the energy sector globally. However, at year-end, crude prices remained well below their pre-pandemic levels. Energy shares in Canada further underperformed because of ongoing challenges, including pipeline capacity — a concern that was heightened by worry that a Biden administration in the US would cancel the permit for the Keystone XL pipeline. The small but volatile health care sector also posted a big decline, as several cannabis companies reported large losses and cut production.
As oil and stock prices plunged in the early stages of the COVID-19 crisis, the Canadian dollar dropped to below US$0.69, its lowest level in more than 16 years. However, since late March, lifted by the rebound of oil and the expectation of a cyclical economic recovery, the loonie has tracked a steady course higher versus the US dollar. By December, the Canadian dollar was at a two-and-a-half-year high of almost US$0.79, diminishing Canadian investors’ returns from their foreign holdings in 2020.
In the US, the equity rebound lifted the Dow Jones above the 30,000 mark for the first time. However, at +7%, the Dow’s advance for the year failed to keep pace with the more growth-oriented S&P 500, which climbed by 16%. The technology, consumer discretionary and communication services sectors led the way with robust gains ranging from 30% to 80% from mega-capitalization stay-at-home/work-from-home companies such as Apple Inc., Microsoft Corp., Amazon.com Inc., Alphabet Inc. (Google) and Facebook Inc. Growth stock indices significantly outperformed value stock indices over the year. In fact, growth’s lead over value of more than 35% is the highest annual spread in over 40 years. As it was in the TSX, energy was the biggest loser in the S&P 500. Defensive, interest-rate sensitive sectors — utilities, real estate, staples — underperformed due to low bond yields. The financials sector fell due to the threat of rising loan losses brought on by the pandemic-related economic slowdown.
As vaccine progress gave equities a final push in the closing weeks of the year, investors also cheered the victory of Joe Biden in the US presidential race, which promises an end to the policy chaos and unpredictability of the Trump administration — especially regarding trade relations. Investors welcomed a fiscal stimulus package of about $900 billion in the final weeks of 2020. However, with the Democrats winning both seats in Georgia’s January runoff election, and thus taking control of the Senate, expectations will rise quickly for another multi-trillion-dollar dose of economic support. Markets reacted positively to the nomination of former Federal Reserve Chair Janet Yellen as Treasury Secretary.
Bank of Canada and Federal Reserve pin target rates near zero
Global bond markets delivered surprisingly strong returns in 2020 as yields dropped. In March, the Bank of Canada joined with the US Federal Reserve (the Fed) in emergency interest rate cuts that brought target rates close to zero, and yields on 10-year and 30-year Government of Canada bonds and US Treasuries fell to record lows. Long-term government bonds, which are more sensitive to rate declines, outperformed short-term and mid-term government bonds. Central banks around the world implemented various stimulus measures to calm credit market volatility. These central-bank support programs drove performance of assets classes directly exposed to those programs, such as both investment grade and high yield corporate bonds.
Long-term rates edged back higher as economic confidence returned in the fourth quarter, while short term interest rates in most countries remained anchored at very low or even negative levels at year end. However, the rise in long-term rates was limited, as the Fed said that its monetary policy will be more accommodative than usual until inflation rises. The Bank of Canada soon followed, signaling that it also intended to maintain a high degree of monetary stimulus until at least 2023.