Last year was anything but boring. We saw a global pandemic, the first bear market since 2008, the end of a decade-long economic expansion—and the sharpest stock market downturn on record. The Fed gave us two emergency rate cuts. Congress gave us the largest fiscal stimulus package in U.S. history. There was a nationwide call to address racial inequality. And we are still not done with one of the most contentious presidential elections in recent memory. 

All that happened in 12 months and the stock market still managed to end December at record highs. So, what valuable lessons did the past 12 months teach us that we can take into 2021?

In his monthly blog, E*Trade’s Managing Director of Investment Strategy Mike Loewengart had the following outlook:

Nasdaq: Queen of the “Stay-At-Home Ball”
Despite the vicious wave of Covid infections, stocks pressed higher in December as vaccines rolled out across the country and Congress passed the long-awaited stimulus 2.0 package, Loewngart said.

“Small caps dominated in the fourth quarter, with the Russell 2000 gaining 31% from October–December to finish the year up 20%—the second-highest annual return of the major indexes. But it didn’t come close to the Nasdaq’s remarkable 45% rally, which cemented its title as the belle of the ‘stay-at-home’ ball,” he said.

Technology held on to its leadership position, despite losing some momentum later in the year, claiming the top spot among the S&P 500® sectors for two years in a row. “While energy and financials—two of the weakest sectors on the year—showed relative strength in the final quarter of 2020, it wasn’t enough to match the pace of growth many high-flying tech names experienced amid the pandemic,” Loewengart reported.

International equities
International equities also closed out the year with solid gains. Emerging markets outperformed developed markets both for the month and the year. “COVID cases have declined in many emerging markets, and China, the original epicenter, has made steady progress in its economic recovery,” the manager said.

Europe has had a tougher time bouncing back. Pockets of the continent have come under strict lockdown restrictions again, and some countries have imposed travel bans after a new fast-spreading strain of Covid was identified in the U.K. and beyond 

Fixed income
While bond returns were muted in December, it was a strong year for fixed income assets across the board. “The bellwether BBgBarc US Aggregate Bond index returned 7.5%. Longer-term Treasuries led the way, returning nearly 18%—although much of that was achieved early last year, when the onset of the pandemic spurred a flight to safe-haven assets. Investment grade corporate bonds also posted a strong performance, up roughly 10%,” Loewengart said.

The yield on the 10-year T-note, which started 2020 at 1.9%, dipped to a record low 0.3% in early March and ended the year at 0.9%, he added.

Themes for 2021
What top trends will E*Trade be watching in 2021? As the markets crank ahead into the new year, there are five developments investment managers at the firm are using as overlays in their analysis, he said.

Vaccine distribution: With stockpiles of vaccinations sitting unadministered in the U.S., it remains to be seen how the nation will handle the logistics of mass vaccinations, Loewengart said. “If distribution goes according to plan, by the second half of the year, a meaningful portion of the general population could be vaccinated. But the timeline isn’t set in stone, and any major disruptions to distribution or manufacturing channels may delay a full economic recovery,” he added.

Stimulus rebounds and ramifications: The latest $900 billion aid package passed by Congress included another round of direct payments, supplemental unemployment benefits, and small business loans. But the question remains—will it be enough, Loewengart said.

Investment managers and advisors should be mindful that there may be after effects of a stimulus package of this size and scope, which could impact the market. In addition to the fiscal relief, “the Federal Reserve has unleashed nearly every tool at its disposal to help prop up the economy. The growing federal debts and deficits and increased money supply may spur inflation and contribute to a decline in the value of the dollar against other major currencies,” he said.

Market trajectory:  It is undeniable, as Loewengart says, that the market has seemingly latched on to a future “that is far removed from current conditions, looking beyond a rampant virus and crippled economy, pricing in optimism for the year ahead.” But can the market continue to roar? “It may take new catalysts for stocks to rise further,” he predicted.

Will small cap and value have their year in the sun? As investors begin to move past the coronavirus, there may be opportunities for new market leadership. While growth stocks have outpaced value stocks by a wide margin in recent years, “small caps and value strategies may be poised to rebound as the economy recovers. Investors may want to focus on the fundamentals of individual companies and sectors for results,” Loewengart said. It will also pay to understand that some effects of the pandemic won’t be going anywhere. For example, individuals’ and companies’ increased reliance on technology and digital infrastructure is unlikely to diminish in the year ahead or frankly, any time soon, he said.

Global growth: Loewengart said the expected change in U.S. leadership may play out globally in surprising ways. For instance, he notes that Morgan Stanley analysts expect global economies to recover more quickly than US equities and with attractive prices relative to their US peers, so international stocks may take the spotlight, he said.