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Market Review
Fourth Quarter
Global Markets Quarterly Update
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Key Insights
- The rollout of the first highly effective coronavirus vaccines sent many equity benchmarks to record highs in the quarter.
- The European Union passed a historic coordinated recovery fund, while the successful negotiation of a Brexit trade bill also bolstered confidence.
- Political uncertainty diminished in the U.S. following the contested November elections, but U.S.-China trade tensions remained elevated.
U.S.
Stocks recorded a solid gain in the quarter, bringing all the major indexes to record highs. The market’s advance witnessed a rotation in leadership, with small- and mid-caps outperforming large-caps, while value shares outpaced their growth counterparts. Energy and financials shares performed best within the S&P 500 Index for the fourth quarter, but both ended in negative territory for the year. Utilities and real estate stocks lagged. Bonds recorded modest returns as longer-term Treasury yields increased, but credit-sensitive issues performed well as investors looked for yield and hopes grew for a reopening of the economy in 2021.
Stocks Jump on Vaccine Efficacy News
Positive developments in the fight against the coronavirus appeared to be the primary driver of gains in the quarter. President Donald Trump’s apparently rapid recovery following his COVID-19 diagnosis in early October seemed to boost sentiment, as optimism grew about the new antibody and antiviral treatments he received. Stock futures surged on November 9 after Pfizer announced that preliminary data showed that the coronavirus vaccine candidate it had developed in partnership with Germany’s BioNTech was over 90% effective in preventing infections—a level well above expectations. The regulatory approval and distribution of the Pfizer/BioNTech vaccine as well as a similar one from Moderna in December seemed to provide a tailwind to stocks as the year came to an end.
The current toll of the pandemic worsened considerably, however, weighing on consumers and perhaps restraining the market’s gains. As daily hospitalizations and deaths reached record highs, California and other states renewed lockdowns, shuttering restaurants and other businesses. Even in areas with looser controls, consumers grew more cautious, as indicated by a drop in restaurant reservations, retail foot traffic, and other high-frequency indicators. Retail sales and household incomes fell sharply in November, while household spending contracted for the first time since April. In December, weekly jobless claims hit their highest level in over three months, and even the robust housing sector showed signs of cooling. The manufacturing sector, which is better insulated from social distancing measures, generally remained a bright spot.
Slowing Recovery Helps Break Stimulus Logjam
Investors took the economic slowdown in stride, seemingly because it made further fiscal stimulus more likely. Progress on a new coronavirus relief bill remained gridlocked early in the quarter, with Democrats proposing a much larger package than Republicans, while the White House was seemingly backing off from negotiations. On December 21, however, Congress finally passed a USD 900 billion bill, which included support for small businesses and extended unemployment benefits, along with USD 600 direct payments to individuals—half the amount of the first relief bill passed in the spring. President Donald Trump surprised many by echoing complaints from Democrats that the amount was too small, proposing instead direct payments of USD 2,000, while demanding that the legislation also include new regulations on social media companies. Nevertheless, he eventually signed the bill on December 27, seemingly helping spark a small rally in stocks to end the year.
The November elections also seemed to boost sentiment. With former Vice President Joe Biden’s victory becoming clear in the days following the election and Republicans seeming likely to retain control of the Senate, investors began to anticipate a Goldilocks scenario of additional fiscal stimulus but more limited tax increases than under a “blue wave” Democratic sweep. President Trump continued to refuse to concede the election, but the initiation of the transition and the failure of his legal challenges to the results in several states seemed to diminish the political uncertainty.
Europe
Shares in Europe rose strongly, extending their rebound. The main factors that drove European markets higher included the deployment of coronavirus vaccines, a post-Brexit trade deal between the UK and European Union (EU), an extension of the European Central Bank’s (ECB) ultra-loose monetary policy, and the approval of a U.S. fiscal stimulus package. However, a renewed surge in coronavirus infections raised fears of a delayed economic recovery that may have exerted a moderating effect on investor sentiment.
Europe Reimposes Lockdown Restrictions; Vaccine Programs Begin
After European economies reopened partially during the summer, coronavirus infection rates began to increase sharply in the fall, prompting governments to impose stricter restrictions on mobility, commerce, and socializing to stamp out a second wave of the pandemic. By quarter-end, the UK government had extended its strictest restrictions across three-quarters of England, seeking to curb the spread of a new variant of the coronavirus. European nations also banned movement to and from the UK. High infection rates prompted other European countries—including Germany, France, Italy, Greece, and Belgium—to introduce tougher measures to minimize personal contact and mobility during year-end celebrations. Some EU countries began deploying a vaccine produced by Pfizer/BioNTech, while the UK approved the use of this treatment as well as one developed by AstraZeneca and Oxford University.
UK Exits EU After Trade Accord Ratified
The UK exited the EU on December 31, after UK Prime Minister Boris Johnson and EU leaders agreed to a post-Brexit trade deal following a tortuous year of acrimonious negotiations. The treaty came into UK law after Parliament voted overwhelmingly in favor of the agreement. The deal, however, does not cover financial services, a strategic sector for the UK economy because the EU wants to repatriate the trading of shares, derivatives, and bonds of Continental European companies.
EU Approves Historic Budget; ECB Expands and Extends Stimulus Measures
EU nations took another step toward financial integration with the approval of the EUR 1.8 trillion budget for 2021 to 2027, which also includes a EUR 750 billion coronavirus recovery fund. The budget was approved after Hungary and Poland dropped their objections to tying payments to rule-of-law principles. The fund will start distributing money to needy member states in the second half of 2021 via grants, raised via EU debt issuance, and loans.
The ECB injected more stimulus into the recessionary economy and forecast a slower eurozone recovery in 2021. Policymakers increased the Pandemic Emergency (asset) Purchase Programme by EUR 500 billion to EUR 1.85 trillion and extended it for another nine months to March 2022. They also agreed to provide banks with more ultra-cheap loans until June 2022, extending this program by a year.
Japan
Japanese stocks produced solid fourth-quarter gains, and the widely watched Nikkei 225 Average eclipsed the 27,000 mark for the first time since 1990. From a style perspective, as measured by the MSCI Japan Index, growth stocks outperformed value shares and large‑caps generated better gains than small‑caps. The yen strengthened versus the U.S. dollar and closed the period near JPY 103. The yield on 10-year Japanese government bonds traded in a tight range and ended the period near 0.02%.
Japan’s Government Unveils a Third Round of Stimulus
Prime Minister Yoshihide Suga announced that the Japanese government is preparing a third stimulus package totaling JPY 73.6 trillion (USD 706 billion) to buttress the flagging economy, which has been pummeled by the impact of the coronavirus. About half of the funding for the plan will come from the central government—divided between a third supplementary budget in the current fiscal year and the 2021 fiscal budget—and from the private sector. The plan includes initiatives focused on reducing carbon emissions and the implementation of digital innovation. The government also intends to increase its funding to various prefectures to increase the number of hospital beds and medical care capacity.
Central Bank Governor Kuroda Vows to Stay the Course on Monetary Policy
Bank of Japan Governor Haruhiko Kuroda confirmed his support for the central bank’s current monetary policy efforts, which have aided corporate financing and created stability in financial markets. While Kuroda acknowledged that Japan’s economy is in a severe situation due to the pandemic, in part because of the resurgence of new cases in Europe and the U.S., he believes the economy has turned the corner and is picking up gradually after bottoming in the April–May period. The governor noted that Japan’s exports have started to increase, especially in automobile-related goods. However, domestic demand remained lackluster. Kuroda believes that the current monetary policy course is necessary to ensure stability in markets and will support sustainable economic growth after the impact of the coronavirus subsides. He said the central bank will closely monitor the effects of the coronavirus on the economy and was willing to pursue additional monetary easing to support corporate activities.
Amid the Spike in Infections, Suga Likely to Postpone Snap Election
According to The Nikkei, Prime Minister Yoshihide Suga is unlikely to dissolve the lower house of Parliament and call for a snap election in January. In the face of falling approval ratings due to the administration’s handling of the pandemic—the latest opinion poll for Suga’s cabinet fell five points in November—the prime minister is expected to focus his efforts on containing the disease and revising the budget plans to revive the economy. New coronavirus cases in Japan have repeatedly hit record levels, and the public’s opinion of the government’s response to the pandemic has faltered. Suga is expected to postpone the snap election until mid-2021, when there are fewer uncertainties and the vaccination efforts are underway.
China
Chinese stocks ended the year at multiyear highs as investors anticipated stronger earnings and economic growth in 2021. The Shanghai Composite Index and CSI 300 Index of large-cap stocks rose 7.9% and 13.6%, respectively, for the fourth quarter. For the year, the Shanghai Composite Index advanced 14%, while the CSI 300 Index rallied 27%.
Bond yields were broadly unchanged in the fourth quarter. The 10-year sovereign yield closed at 3.19%, up two basis points (two basis points equals 0.02%). The uptrend in yields since May reversed in December on generous liquidity provisions from the central bank, lower supply, and negative inflation readings. A spate of corporate bond defaults in November caused concern but were more company-specific rather than systemic. Yields above 3.0% are attractive to foreign investors, and China’s bond market continued to attract inflows. The renminbi rose by 3.8% over the quarter against the U.S. dollar, drawing support from a reduction in geopolitical risks after Joe Biden’s presidential victory and news of coronavirus vaccine breakthroughs. New cases of COVID-19 reportedly appeared in some Chinese cities, but local lockdowns, contact tracing, and testing appear to have prevented its spread.
Policy Slowly Returns to Neutral
China was the first major economy in 2020 to successfully contain the coronavirus and experience a V-shaped recovery with relatively little damage. At the Central Economic Work Conference in Beijing in December, senior officials said consumption and private investment would become more important growth drivers in 2021, replacing infrastructure and residential property investment. China has effectively left stimulus on hold, with neutral settings for both monetary and fiscal policy. Officials also announced their intention to place more emphasis on financial stability and deleveraging, reflected in the announcement of new limits on banks’ exposure to property loans for the first time. A series of minor curbs in recent years had done little to dampen a buoyant property sector.
Macroeconomic data was mostly resilient in the fourth quarter. Industrial production grew by 7% year-on-year in November, retail sales by 5%, and fixed asset investment by 2.6%. China’s trade surplus hit a new record in November as exports increased by 21.1% year-on-year. CPI inflation declined in November due to lower pork prices, the first time the measure recorded negative growth since October 2009.
U.S.-China Relations Under Strain
The U.S. added four more large state-owned enterprises (SOEs) to its investment blacklist of stocks deemed to have links with the Chinese military in December. Additionally, President Trump signed the Holding Foreign Companies Accountable Act, which requires publicly traded foreign firms to comply with U.S. audit rules within three years or be delisted. In domestic corporate news, Beijing appeared intent on tightening its grip on the country’s fast-growing and increasingly disruptive internet sector, particularly e-commerce leader Alibaba and its fintech affiliate company Ant Group.
Other Key Markets
Central Bank Changes Support Turkish Assets
Turkish stocks, as measured by MSCI, returned 30.31% in the fourth quarter of 2020 versus 19.77% for the MSCI Emerging Markets Index. Returns in dollar terms were lifted by a gain of more than 3% in the lira versus the U.S. dollar.
Following a period of weakness for Turkish assets, especially the lira, amid increasing inflation expectations, President Recep Tayyip Erdoğan removed central bank Governor Murat Uysal in November; shortly thereafter, Treasury and Finance Minister Berat Albayrak resigned from his position. In response, Erdoğan—who has the unconventional belief that high interest rates cause high inflation—appointed close advisors and more experienced policymakers Naci Ağbal to be the new head of the central bank and Lutfi Elvan to be Treasury and Finance minister.
Under Uysal’s leadership, the central bank started tightening financial conditions during the summer by increasingly providing lira liquidity to banks by way of more expensive liquidity channels, rather than by way of the benchmark
one-week repo auction rate. Official interest rate increases in the latter part of September and late October failed to assure investors that the central bank was serious about getting inflation under control.
After Ağbal assumed leadership of the central bank, policymakers implemented additional interest rate increases in November and again in December, lifting three key interest rates: the one-week repo rate (to 17%), the overnight lending rate (to 18.5%), and the late liquidity window facility rate (to 21.5%). All of these rates are well above the central bank’s projected 12.1% inflation rate at the end of 2020.
Following its late-December policy meeting, central bank officials indicated that their tight monetary policy “will be decisively sustained” until there are indications that there will be a “permanent fall in inflation.” While T. Rowe Price sovereign analyst Peter Botoucharov believes that monetary tightening will remain in place for about four to six months, he also believes that inflation is likely to remain elevated in 2021 amid talks about a 20% increase in the minimum wage and in the absence of tighter fiscal measures.
Chilean Stocks Gain Amid Debate About Pension Withdrawals
Stocks in Chile, as measured by MSCI, returned 28.67% in the fourth quarter. A gain of nearly 11% in the Chilean peso versus the U.S. dollar boosted returns in dollar terms.
During the quarter, Chilean lawmakers developed legislation that would permit individuals to withdraw money from the pension system to help them get through the pandemic-driven economic downturn. It was, in fact, the second such bill this year; the first one was enacted during the summer.
While many lawmakers and citizens were supportive of the new measure, the head of the central bank, Mario Marcel, expressed opposition due to its potential to have negative implications for asset prices. Chilean President Sebastián Piñera also opposed the bill and sent the matter to the Constitutional Court, which ruled against it in a 6–5 vote. Before the bill was struck down, however, Piñera submitted a “parallel” pension withdrawal bill to Congress to hinder the other bill’s progress. Piñera’s effort succeeded: His bill was eventually passed by both chambers of Congress, and it was ultimately not too dissimilar to the one it replaced.
While the reduction in pension savings and the long-term cost to Chilean fiscal accounts are the downside of premature pension withdrawals, T. Rowe Price emerging markets sovereign analyst Aaron Gifford notes that these emergency pension withdrawals represent an important inflow into consumers’ pockets. The funds will enable citizens to pay down debt, purchase necessities, and increase their savings.
Major Index Returns
Total returns unless noted
As of 12/31/2020
Figures shown in U.S. dollars
| 4Q20 | Year-to-Date | |
| U.S. Equity Indexes | ||
| S&P 500 | 12.15% | 18.40% |
| Dow Jones Industrial Average | 10.73 | 9.72 |
| Nasdaq Composite (Principal Return) | 15.41 | 43.64 |
| Russell Midcap | 19.91 | 17.10 |
| Russell 2000 | 31.37 | 19.96 |
| Global/International Equity Indexes | ||
| MSCI Europe | 15.66 | 5.93 |
| MSCI Japan | 15.29 | 14.91 |
| MSCI China | 11.21 | 29.67 |
| MSCI Emerging Markets | 19.77 | 18.69 |
| MSCI All Country World | 14.79 | 16.82 |
| Bond Indexes | ||
| Bloomberg Barclays U.S. Aggregate | 0.67 | 7.51 |
| Bloomberg Barclays Global Aggregate ex-USD | 5.09 | 10.11 |
| Credit Suisse High Yield | 6.15 | 5.48 |
| J.P. Morgan Emerging Markets Bond Global | 5.49 | 5.88 |
Past performance cannot guarantee future results.
Note: Returns are for the periods ended December 31, 2020. The returns include dividends and interest income based on data supplied by third‑party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only.
Sources: Standard & Poor’s, LSE Group, Bloomberg Barclays, MSCI, Credit Suisse, Dow Jones, and JP Morgan (see Additional Disclosures).
What We're Watching Next
Rapid progress with a first wave of new vaccines based on messenger RNA technology is clearly the most positive sign for the year ahead. As the pandemic hopefully recedes and economies reopen, a broader economic recovery is likely to benefit many of the sectors that were most damaged by the virus, such as travel and leisure. However, technology, e‑commerce, and home delivery firms that saw sales surge during the pandemic could face tough earnings comparisons. Uneven progress could produce periods of market volatility, and we don’t yet fully understand the pandemic’s long‑term impact on consumer behavior.
The recent passage of a new round of fiscal stimulus provides an important bulwark under the recovery in the U.S., but economic conditions are likely to remain challenging in the first quarter. In Europe, the fiscal outlook is encouraging. Unlike in past economic emergencies, such as the 2012 European sovereign debt crisis, the European Union (EU) is not imposing austerity but, rather, has committed to fiscal stimulus and is acting in a concerted, cohesive fashion. China’s recovery appears robust, relative both to the developed world and to other emerging market economies.
A rapid economic recovery could bring an accelerated earnings recovery for U.S. and global markets. Following the last recession, it took the S&P 500 Index five years to regain its previous earnings-per-share peak—this time, it could happen in 2021. However, rapid earnings growth might not translate into strong equity returns, with much of the recovery already priced into the markets.
In style terms, a more normal cyclical recovery could continue to boost value stocks relative to growth, a reversal of the powerful trend toward growth dominance—and unprecedented dispersion of stock returns—seen since the 2008–2009 global financial crisis. A return toward pre‑pandemic consumer spending patterns could further improve the attractiveness of sectors, such as financials and energy, that are heavily represented in the value universe relative to the tech stocks that dominate the major growth benchmarks. However, investors seeking value opportunities will need to be careful about stock selection—seeking out companies that appear well positioned to emerge from the pandemic with lasting competitive advantages, while avoiding firms that face longer‑term secular challenges.
A stronger recovery in 2021 would carry risks for bond investors. Massive infusions of central bank liquidity successfully stabilized global credit markets in 2020, even as a pandemic‑driven flight to quality pushed already low sovereign yields even lower. With short‑term yields at ultralow or negative levels and the U.S. yield curve steepening as economic growth and inflation expectations revive, interest rate risk could become a critical issue. Investors may decide to move further out the credit risk spectrum, increasing allocations to floating rate loans and other low‑duration assets, and seeking opportunities in non‑U.S. debt markets. Skilled credit analysis could be crucial to success.
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