Talking Points
December 23, 2020 | 13:23
2020 Hindsight
Economics
Economics
In a year that many would like to forget, there certainly were many unforgettable market moments. Perhaps the peak drama was reached in the second week of March when, in the matter of a few days, the WHO officially declared a pandemic, the Fed slashed rates to the lower bound, OPEC and Russia engaged in a ruinous price war, sports leagues shut down, the U.S. closed its borders to Europeans, and equities had their worst week in decades. At one point in the span of just six short trading days, the MSCI World index plunged 20.2%—a full-on global bear market—before reeling off a 14% rebound in a six-day span into early April after the Fed rode to the rescue. Acting almost as a mirror image to the market’s March Madness, November Nirvana proved a second hinge, with the U.S. election out of the way and extremely positive vaccine news arriving shortly thereafter. Global equities thus saw three months with a double-digit price move (two up, one down) in a single year after a decade without even one such monthly move. |
Of course, the market mayhem around the pandemic wasn’t the end of it, in a year that saw the deepest global economic setback of the post-war era, record joblessness in North America, second and third virus waves, U.S. civil unrest, a near-war with Iran, simmering trade and tech tensions with China, a Russian hack, Brexit uncertainty (again), and an endless U.S. election cycle that then required four days to declare a winner. But some of the historic financial market moves are the primary focus here; the five below are perhaps the most astonishing, amazing, memorable from a year that ticked all those boxes. How Stocks Stopped Worrying and Learned to Love the BondThere were many subplots to this year’s financial market moves, but there was one dominant storyline: the violent and sudden five-week downdraft for all risk assets, which then gave way to a sustained and forceful recovery for most of the rest of the year. Like so many rallies in the past during the heart of economic trauma, this, too, was met with disbelief and derision, at least initially. There was some grudging acceptance that tech sectors which benefited directly from the shutdowns could lead the way; and, the Nasdaq had an amazing 40%+ gain for the full year. But eventually the rebound gained adherents, and momentum, as more cottoned on to the full extent of the less-than-invisible-hand of the Fed’s support. More fundamentally, the plunge in long-term yields and, eventually, a V-shaped recovery for earnings were important tailwinds. Ultimately, the prospect of a broader economic recovery, courtesy of the vaccines, completed the comeback. It was a tie for the most compelling factoid of the year for equities. First, the fastest bear market ever from a record high for the S&P 500, as it fell more than 20% in little more than three weeks after its mid-February peak. (Notably, the historic bull market that started in March 2009 expired almost exactly on its 11th birthday.) Second, the fastest full recovery from a bear market, with the S&P 500 hitting a fresh record in mid-August, less than five months after bottoming out on March 23. Commodities: From Negative Oil to Positives for All ElseNegative oil prices… need we say anything more? Technical factors were behind the dive into negative terrain for oil futures prices—it only happened for the nearby contract on WTI on April 20. But the bigger picture was that the harrowing drop punctuated the steep decline in all contracts through the spring, which saw declines on the order of 70%. The negative print prompted deep supply cuts around the world, both officially by OPEC+, but also from other producers, which saw the market stage a two-step recovery through the rest of the year. Even so, after beginning 2020 at above $60, oil prices ended the year down more than 20%. Almost as jaw-dropping as the wild swings in crude was the astonishing strength in almost all other commodities. Even amid the deepest global downdraft in decades, most non-oil resource prices posted double-digit gains in the past year. Lumber prices doubled amid the rollicking rebound in North American housing markets and early supply cuts, while copper led the way for all base metals as China’s speedy recovery and supply issues provided support. But, more broadly, the fast rebound in resource prices even amid a global downturn can be attributed to the unique nature of this particular recession—one that favoured goods over services, to the benefit of commodities. Full Circle for the Big DollarThe rebound in commodity prices was also wind-aided by the steady decline in the U.S. dollar over the final three quarters of 2020. However, that dollar descent was only after the currency spiked in the midst of the market turmoil in March, reaching its highest level since early 2003 on a trade-weighted basis against the majors. After jumping nearly 8% in the flight to safety, the dollar then sank more than 12% on average from the peak, to end the year down roughly 5%. As part of the return-to-risk-assets theme, a basket of emerging market currencies came full circle and ended the year almost exactly unchanged against the greenback, led by a 6% rise in the Chinese yuan. But lest you believe that the dollar is especially weak and has little room to fall further, note that it is now still within 1%-to-2% of its average level of the past 30 years on trade-weighted basis, and remains more than 20% above the lows hit in 2011. Given that foreign exchange markets saw much less drama than most other financial markets, it’s tougher to dig out a truly memorable FX stat. But, perhaps most curiously, the winner of strongest currency of the year goes to Sweden’s krona, which rose more than 12% against the dollar. While Sweden was much maligned for its non-consensus handling of the pandemic, it did see one of the lightest hits to GDP (an expected drop of 3.5%, versus a near-7% decline in the Euro Area). The nation also had the unusual ‘luck’ of being among the last to hike rates (at the end of 2019) just before the pandemic hit, and the Riksbank chose not to budge through this year after finally getting its key rate back up to zero a year ago. |
Bonds AwayAfter long ago venturing into the nether world of negative yields in Europe and Japan, it’s a challenge to impress jaded bond markets. But 2020 gave it a go, with North American long-term yields hitting all-time lows, even amid a wave of fiscal stimulus and bloated budget deficits almost everywhere. The IMF estimates that global fiscal support was on the order of a towering 12% of world GDP this year, an enormous effort. Yet, because private sector borrowing all but dried up, and QE efforts were turned to the max, this bulge in government debt had no perceptible impact on borrowing costs. On the contrary, as 30-year Treasury yields at one point dipped below 1%, before spending much of the year grinding back above 1.7% (still below the Fed’s 2% inflation target). 30-year Canadas spent much longer below the 1% threshold, before finishing the year closer to 1.3%. But, as in the Treasury market, negative real long-term yields look like a semi-permanent feature on the bond landscape, something never seen before 2020. The sustained bout of negative long-term real interest rates kept putting mortgage rates under pressure through the year. Even with a back-up in bond yields late in 2020, mortgage rates were still able to hit new all-time record lows as the year came to a close. For example, the 30-year rate posted by Freddie Mac fell to just 2.67% in mid-December, down by more than 100 bps since the start of the year, and a massive 227 bps below the nearby highs reached barely two years ago in November 2018. Not surprisingly, housing has been a star performer in the North American recovery. Canadian CalmWhen looking back over the tumult of 2020, perhaps what’s most interesting is how little most Canadian markets moved on net for the year. For example, while the Canadian dollar saw two large swings, it ended the year not far at all from where it began 2020 ($1.299 or just under 77 cents), even with a short trip above $1.45 (or below 69 cents) in March. It was a largely similar story for the TSX, which kicked off the year just a tad above the 17,000 level and looks set to finish only a few percentage points higher. Of course, that seemingly placid surface hid a range from as low as 11,200 and a record high (in mid-February) of nearly 18,000. Even commodities overall were little-changed on net, as judged by the Bank of Canada’s index, as a double-digit drop in oil was offset by double-digit gains in almost everything else. The one domestic market that did see a massive move was the fixed-income space, as overnight rates were slashed 175 bps in March, 2-year yields fell 147 bps, 10s were down almost 100 bps and 30s by nearly 50 bps, in neat and tidy steepening. But even for bonds there was a modicum of sameness—Canada/US 10-year spreads ended the year precisely where they began at -22 bps. Likewise, provincial bond spreads spent much of the year grinding back close to level after a gut-churning lurch in March, a move that characterized a wide variety of financial markets in this memorable year. |