The Rear View & Road Ahead: 2020 Edition

January 04, 2021

This newsletter is our take on the themes we think are driving markets and what could be coming around the bend. We don’t try to predict the future but instead aim to understand the landscape we’re traveling through and design a strategic plan accordingly.

There are three sections to enjoy:

  1. The Rear View: Our summary of the events that shaped economies, markets, and geopolitics
  2. Talking Shop: The numbers and data that characterized investment markets
  3. The Road Ahead: A longer essay detailing how we think about wealth management

1) The Rear View


What we liked: There was not much to "like" economically in 2020, but the unemployment rate and the labor force participation rate in the U.S. continued their rebound to pre-pandemic levels with still more room to grow.

What we disliked: Consumer sentiment fell in November and continues to hover near April 2020 levels. Sustained consumer spending is critical to keep the recovery moving ahead, particularly on services.

What we are watching: Stimulus packages, central bank policies, and changing attitudes towards globalization can all have inflationary effects. As consumers' pent up demand is unleashed and the Fed tolerates inflation above its 2% target, will prices keep rising or are inflation fears overblown? We think the latter is more likely, but time will tell.


What we liked: This year delivered the fastest, but also the shortest, bear market on record. Fortunately, markets around the globe rebounded and indices earned positive returns for the year.

What we disliked: Following the shortest bear market in history, markets around the globe surged, largely on the back of fiscal stimulus and accommodative monetary policy, including near all-time low interest rates. While low interest rates can support higher price to earnings ratios, a quick jump in interest rates could cause a vicious cycle of falling bond and stock prices. A balanced stock and bond portfolio needs to be carefully managed.

What we are watching: Value stocks, which trade at lower prices relative to their fundamentals, outperformed Growth stocks by the most in a quarter since December 2016. Value strategies have lagged badly over the last 10 years - is this recovery a sign of Value rebounding or a mirage?


What we liked: Scientists around the globe coordinated and worked at a rapid pace to release three vaccines before the end of the year. It's been encouraging and humbling to see nations come together to solve a global crisis. Front-line and essential workers rose to challenge after challenge and continue to work tirelessly as we enter 2021.

What we disliked: Iran began enriching uranium to a 20% purity level, which reduces the time for Iran to obtain weapons-grade uranium. As we discussed in this letter last year, escalated tensions in a fragile region need to be managed and watched carefully.

What we are watching: The Trump Administration struck a combative tone with China, imposing tariffs and blocking technology. On the campaign trail, President-elect Joe Biden promised to repair relationships across the globe - will the incoming administration provide relief from tariffs or keep the pressure as China rises? What will be the economic and regional security implications?

2) Talking Shop

All data supplied by YCharts Inc. unless otherwise noted

64% of the companies in the S&P 500 had positive returns in 2020, but these companies represented 81% of the S&P 500 market capitalization - highlighting how a few of the largest companies have carried the index this year. Tesla (743% return) & Etsy (302% return) are not displayed.

Sector investment performance differences were stark in 2020, as Technology and Consumer Discretionary boomed with workers at home and Energy cratered as aggregate demand, travel, and commuting plummeted.

Scientists around the globe continue to develop COVID-19 vaccines with 3 already approved for full use.


3) The Road Ahead

Davey Quinn, Founder

At the end of a movie when the protagonist leaves something behind, they often take one last look before moving forward. Many people will not be nostalgic about 2020, but we think it’s wise to take one last review of this year as we step into the new year.

Given that, we are going to outline our themes for 2021 and beyond over the coming weeks. The first, as is apropos, is the continued COVID pandemic. We are not out of the woods yet, but there is light at the end of the tunnel – what “COVID echo” can we expect moving forward? Over the next month, we will be discussing stock market valuations and interest rates, a rebound in China and the emerging world, and an asset allocation framework and its implications.

The COVID Echo

The COVID pandemic has appropriately led news coverage this year, in fact, only the world wars have had a similar share of news stories. With vaccines approved for emergency use and the rollout in full effect, hopefully the worst of the virus is behind us. Yet nearly all aspects of life have been altered by the pandemic – what are the pandemic echoes that may reverberate for the foreseeable future?

1. Work & School From Home

This year sweatpants replaced slacks and parents became project managers, orchestrating a new work/school environment from home on short notice. While it has certainly been a challenge to manage at times, office workers would like to continue working from home after the pandemic. In fact, 72% of office workers would like to work from home at least two days per week going forward, according to a survey from PwC.

There is broad consensus for such an environment too, 89% of executives surveyed said many or most of their employees would be able to work from home at least one day per week, from the same survey.

Working parents with young children favored working from home more than the population as whole and working mothers with young children in particular were 30% more likely to report higher job satisfaction. Over 80% of parents with school-aged children preferred a hybrid or all-virtual learning environment during the pandemic, but it is not clear what their preference will be once the pandemic has abated. About 2 out of 3 parents with school-aged children have expressed concern about the quality of education in an all-virtual environment.

2. Sustainability Includes More Than Green

One glaring outcome from the market collapse and subsequent rapid recovery is that many companies performed vastly different. One data point often discussed is that the top 5 companies in the S&P 500 outperformed the index by over 35% and the bottom 495 companies underperformed the index by 6%. This highlights the impact the largest, tech-focused companies have on S&P 500 returns (the top 5 companies are Facebook, Amazon, Apple, Microsoft, and Google).

There are many reasons why these firms have performed so well, but one theme to highlight is their resiliency. Oftentimes, investors associate sustainability with green environmental practices, but company resiliency is a major aspect of corporate sustainability too. We believe a focus on climate change and the environment is essential, but sustainability goes beyond that.

Resilient corporate practices such as a focus on employee satisfaction, board effectiveness/independence, and incorporating customer feedback are critical in pandemics and whatever other risks arise. Recent research by Blackrock found that during the worst of the pandemic “companies with a record of good customer relations or robust corporate culture are demonstrating resilient financial performance”.

3. E-Commerce Expands

The pandemic quickly changed how we buy and consume goods and services. Food and grocery delivery took off while many services had to be put on hold. E-commerce has been a trend for a while, but it historically focused on luxury and discretionary goods. Across the globe, there has been an expansion of e-commerce into new products and customer segments.

Habits once formed are hard to break, especially if they are more convenient and of similar quality. This suggests that the expansion of e-commerce into more essential products, such as groceries, staples, and personal care/medicine, and across customers, such as elderly consumers less likely to shop online previously, will continue. New customers (those that never engaged in e-commerce before) drove over 50% of the increase in online grocery shopping and curbside pickup from restaurants, across various countries according to an ongoing consumer sentiment survey by McKinsey.

The Takeaway

Long-term adoption of work from home and expanded e-commerce options are likely here to stay. The impacts from these shifts affect many sectors, a few that we highlight are continued at-home fitness equipment sales, a changing commercial real estate landscape, and innovative e-commerce and e-services options replacing previously brick-and-mortar driven activities. In addition, companies across sectors that operate with flexibility, a light footprint, and sustainable practices should thrive regardless of the headwinds coming.

First, we believe that at-home fitness will continue its growth post-pandemic as families cancel their gym memberships near the office. The expanded comfort with e-commerce also provides some tailwinds to this trend, as consumers aren’t as nervous about making large purchases online. Companies like Peloton, Nike, Lululemon, and even Apple with its newly launched fitness program Fitness+ are well-positioned in the sector.

Second, we see co-working spaces fading but coworker socializing accelerating. Humans are social animals and once the vaccines are widely distributed, we see a shift from working in shared spaces, like WeWork, to working at home but meeting coworkers for lunch, happy hour, or dinner. This would spell a rebound for restaurants and bars that are close to where people live, including suburbs and near-cities. Commercial real estate in big, expensive cities and companies heavily focused on brick-and-mortar may see strong headwinds as the work from home and e-commerce themes play out.

Third, all the themes mentioned above imply that digital collaboration and e-services must get better. There are opportunities to expand on the digital landscape provided by companies like Zoom, DocuSign, and Slack, but a new entrant with deeper and more engaging software is something to keep an eye on.

In addition, about 65% of consumer spending is on services, and consumer services have not fared as well as consumer goods during the pandemic. Vaccines should provide a boost for services, but innovative e-services for online healthcare, education, fitness, and finance could all be improved.

If you have any questions about our firm or the first of four 2021 insights, please reach out at (202) 301-5050.

Investment advisory services provided through Wealthcare Advisory Partners LLC doing business as Pine Harbor Wealth. Wealthcare Advisory Partners LLC is a registered investment advisor with the U.S. Securities and Exchange Commission.

Past performance is not a guide to future returns.