Thrivent Asset Management Contributors to this report: Mark Simenstad, CFA, Chief Investment Strategist; Steve Lowe, CFA, Vice President, Mutual Funds-Fixed Income; John Groton, Jr., CFA, Director of Administration and Materials & Energy Research; Matthew Finn, CFA, Head of Equity Mutual Funds; and Jeff Branstad, CFA, Senior Investment Product Manager

The stock market reached an all-time high as trading closed for 2020 – a bright spot for bold investors who stuck with stocks during an otherwise tumultuous, pandemic-plagued year.

Historians will likely reflect on 2020 as a year marked by the tragedy of COVID-19, civil unrest, soaring unemployment, and a bitter national election. But the stock market managed to shrug off the storm of adversity to deliver surprisingly strong returns. The S&P 500® Index moved up 16.26% for the year – an 18.40% total return including dividends.

The NASDAQ Index performed even better, closing the year up 43.64%, bolstered by a 15.41% gain in the 4th quarter.

The strong stock market growth was aided in large part by the unprecedented action of Congress and the Federal Reserve (Fed), which injected trillions of dollars into the economy to provide financial assistance for struggling businesses and laid-off workers. Another contributing factor was the strong performance of technology stocks, as the S&P 500 Information Technology sector surged 43.89% and Communications Services jumped 23.61%.

And while much of the retail market suffered throughout the pandemic, non-store retail sales (primarily online) were up nearly 30%, according to the U.S. Department of Commerce.

Income investors, however, were not as fortunate, as bond yields sank to an all-time low. After two significant cuts in the Fed funds rate by the Federal Reserve, U.S. Treasury yields dropped to the lowest level in U.S. history – with 10-year treasuries dipping to a low of 0.51% in August before edging up in the final months of 2020 to close the year at 0.92%.

Oil prices also suffered throughout the year, as global travel by air and automobile slowed to a crawl during the pandemic. However, as travel began to pick up, oil prices recovered some of the lost ground. The price of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, moved up 20.64% in the 4th quarter to close the year at $48.52 per barrel.

Drilling down

U.S. stocks rise

The S&P 500 Index rose 3.71% for the month of December, from 3,621.63 at the end of November to 3,756.07 at the December close. It was up 11.69% for the 4th quarter and 16.26% for the year. The total return of the S&P 500 (including dividends) was 3.84% for December, 12.15% for the 4th quarter, and 18.40% for all of 2020. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)

The NASDAQ Index was up 3.54% in December, from 8,665.47 at the November close to 8,972.60 at the end of the year. It was up 15.41% in the 4th quarter and up 43.64% for the year. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

Retail sales continue recovery

Although thousands of stores, restaurants and small businesses continue to face financial challenges due to the pandemic, retail sales have begun to recover from the economic downturn. According to the Department of Commerce retail report issued December 16, retail sales were down 1.1% in November from the previous month, but up 4.1% from November 2019.

The recovery in retail sales has been led by strong online sales. Non-store retail sales (primarily online) were up 0.2% from the previous month in November and up 29.2% from a year earlier

Home improvement projects during the pandemic led to strong growth in the building materials and garden supplies category, with sales in November up 1.1% from the previous month and up 18.7% from a year earlier. Automobile sales have also been one of the strengths of the retail market, although November auto sales were down 1.7% from the previous month. But auto sales in November versus a year earlier were up 6.4%.

With many bars and restaurants hampered by the pandemic, food and drinking establishments have been one of the hardest hit areas of the economy. Sales for food services and drinking places were down 4.0% in November and down 17.2% versus a year earlier. Department store sales have also suffered due to the pandemic, with sales down 7.7% in November versus the previous month, and down 19.0% versus a year earlier.

Unemployment remains high

Weekly unemployment claims increased modestly in December, as many states imposed lockdowns to counter the growing COVID-19 pandemic. Average weekly unemployment claims rose to 836,750 for the month (through December 26) from 747,625 per week in November, according to the Department of Labor.

However, the overall unemployment rate was unchanged in December at 6.7% after seven consecutive months of declines, as previously laid-off workers began returning to their jobs, according to the Department of Labor Employment Situation Report issued January 8. But the rate is still nearly double the pre-pandemic rate in February of 3.5%.

Average hourly earnings increased by $0.23 for the month to end the year at $29.81.

Most sectors post gains

Eight of the 11 sectors of the S&P 500 made gains in 2020, led by Information Technology, up 43.89%, Consumer Discretionary, up 33.30%, Communications Services, up 23.61%, and Materials, up 20.73%.

The three sectors that posted losses for the year included Energy, down 33.68%, Real Estate, down 2.17% (with commercial real estate suffering due to the pandemic), and Financials, down just 1.69% after making a strong recovering in the 4th quarter with a  23.22% gain for the quarter.

The chart below shows the results of the 11 sectors for the past month, quarter and year-to-date:

Treasury yields tick up

The yield on 10-year U.S. Treasuries moved up in December, from 0.84% at the end of November to 0.92% at the end of December.

The yield had dropped precipitously in March when the Federal Reserve cut the Fed funds rate to a range of 0 – 0.25% in an effort to buoy the economy. After dropping to an all-time low of 0.51% in August, the yield trended up through the final months of the year. However, the 0.92% yield at the close of 2020 was still 1.0% below the 2019 closing yield of 1.92%.

Corporate earnings edge up

Corporate earnings expectations continued to edge up in the 4th quarter, steadily rebounding from a steep drop in the 1st quarter when the adverse effects of the pandemic first gripped the economy.

The 12-month forward earnings per aggregate share of the S&P 500 was up 6.04% in the 4th quarter after a 2.03% gain in the 3rd quarter. However, for the year, 12-month forward earnings were still down 6.02% from a year ago.

Forward P/E ratio continues to climb

As stock prices rose over the past year, so did valuations. Even with a solid improvement in earnings projections in the 4th quarter, the forward S&P 500 P/E (price-earnings ratio) closed 2020 at 22.46 – which was well above the 2019 closing level of 18.18 and the 2018 closing level of just 14.4.

In fact, over the past two quarters, the 12-month forward P/E has been at its highest level since 2002. The higher the P/E ratio the more expensive stocks are relative to their earnings. But if the outlook for corporate earnings continues to improve, that could help drive the P/E back down to a more moderate level.

The forward 12 months earnings yield for the S&P 500, which is the inverse of the P/E, ended the year at 4.45%, which is well below the 5.50% yield at the end of 2019 and the 6.94% yield at the end of 2018. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. Although the yield has dropped by about 2.5% over the past two years, it is still significantly higher than the 0.92% market rate of 10-year U.S. Treasuries.

Euro and Yen gain versus dollar

The Euro gained 9.0% versus the dollar in 2020 while the Yen gained 5.0%. The dollar’s weakness has been attributed, in part, to the Fed’s decision to inject trillions of dollars into the financial markets to help shore up the economy during the pandemic.

Oil prices rally

Oil prices slumped in 2020 as travel slowed dramatically due to the global pandemic. Although prices rallied during the 4th quarter, the price of oil remained well below its 2019 closing price. The price of West Texas Intermediate surged 20.64% in the 4th quarter as travel began to pick up, closing the year at $48.52 per barrel. However, for all of 2020, the price was still down 20.54% from its 2019 closing price of $61.06 per barrel.

Gold prices move up

Although gold prices edged down 0.02% in the 4th quarter, it was a banner year for gold, which historically tends to rise during turbulent and uncertain times. For the year, the price of gold  moved up 24.42%, from $1,523.10 per ounce at the close of 2019 to $1,895.10 at the end of 2020.

International equities rise

International equities rallied in the 4th quarter, as the MSCI EAFE Index climbed 15.75% over growing optimism of an economic recovery. For the year, the MSCI EAFE, which tracks developed-economy stocks in Europe, Asia and Australia, was up 5.43%.