SIA Perspectives - Stegner Investment Associates, Inc.
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SIA Perspectives
Stegner Investment Associates, Inc. 4th Quarter 2020
In last quarter’s SIA Perspectives, we advised clients to resist the temptation to guess how the outcomes of the U.S.
elections in November might impact financial markets. Our recommendation was to “vote with your ballot, not your
life savings,” and investors who heeded this advice likely earned outstanding returns for the 4th quarter and for the year.
“Believe It or Not”, echoing our theme from the 3rd quarter, all major stock markets around the world moved higher by
double-digits during the last three months of the year. Our key observations outlined in this SIA Perspectives can be
used as a tool to assess market performance and as a reminder of our solid recommendations made throughout 2020.
What Happened in 2020?
Financial markets faced many struggles throughout the year that are important to remember. Below, we recap sections
of SIA’s communications – conveyed through our quarterly themes – as a reminder of the uncertainty experienced by
investors throughout 2020.
1st Quarter – “Goldilocks Economy Disappears”
During the 1st quarter, the global pandemic caused by the Coronavirus
(COVID-19) marked the end of an eleven-year bull market, which was the
longest bull market in U.S. history.
Stocks closed out the 1st quarter with the worst performances since the
depths of the financial crisis a decade ago. Despite the damage of this swift
downdraft, we advised clients to heed the advice of Vanguard’s legendary
founder, Jack Bogle:
“Stay the course. It is the most important single piece of investment
wisdom I can give to you.”
2nd Quarter – “Financial Markets Zoom Higher”
As an icon for the 2nd quarter theme, the laptop image of a virtual meeting
illustrated key positive events during the period that impacted financial
markets. In turn, stocks and bonds “Zoom”ed higher as business
shutdowns began to unwind and people went back to work.
Investors also cheered the initial results of the stimulus packages from the
U.S. Government and the liquidity easing in the bond and money market
systems that were aided by actions of the U.S. Federal Reserve (Fed).
The passage of Coronavirus Aid, Relief and Economic Security Act
(CARES Act) provided direct payments and loans to individuals and
businesses most severely impacted by the shutdowns.
3rd Quarter – “Truth is Stranger Than Fiction”
Financial markets soared again during the 3rd quarter with new data
indicating that economies worldwide were recovering as consumer
spending increased and employment numbers continued to improve.
Good news of unprecedented efforts by governments and industries to
discover a COVID-19 vaccine also gave investors hope. While interest rates
around the world remained at historic lows, investors sought higher returns
in riskier stock and bond market segments.
“20/20 Hindsight” is the theme for the 4th quarter and captures that
successful investors avoid looking at past results and focus instead on the
future. With this vision, they avoid making emotional decisions that could
impact negatively the ability to meet long-term investment objectives.
Despite a bumpy October, investors celebrated news in November that
included U.S. election outcomes and successful results of COVID-19
vaccine trials with initial timetables for distribution before year end. In a
swift turn of events, the year’s stock market favorites were ditched, while
those segments expected to benefit the most from the good news soared.
The year was literally split in two with early results producing one of the worst
quarters of financial market performance followed by three consecutive quarters of
unprecedented gains.
In hindsight, who knew on March 23rd that stock markets would have bottomed-out
and that one of the strongest and swiftest rallies in history would allow U.S. stock
benchmarks to generate extraordinary returns from that day’s low through year-end,
as indicated in the grid to the right.
How Did Various Asset Classes* Perform?
The 1st quarter declines for stocks around the world reminded investors that diversification is essential. Bond market
segments and money market funds provided stability to portfolios during the stress of the downdraft in stocks caused
by the onset of the pandemic. Then, the swift and powerful rebound in stocks during the next three quarters served as a
good reminder to maintain diversification and not try to guess the direction of stock prices over the short-term. Total
returns (price change + income) for all major asset classes listed below are extraordinary in a year marked by a series
of unprecedented events.
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 2020
22.1 20.8
14.9 14.8 16.0
9.1 7.8
4.8 7.5 4.7
3.1 0.3 2.92.7 1.3
0.6 1.1 0.7 0.0 0.4
-0.5 0.0 0.0
-21.0
-22.8
U.S. Stocks Int'l Stocks US Taxable Bonds Municipal Bonds Money Market
*Representative benchmark index total returns for all charts are detailed on the last page of this SIA Perspectives.
The 4th quarter rally powered all stock market segments higher as indicated in the table on the next page. Not only did
the large cap S&P 500 Index set record highs in December, the Russell 2000 Index of smaller companies rallied almost
100% from March lows. Returns for the quarter also proved a significant change in leadership as U.S. large caps
lagged every other market segment. In fact, small cap stocks earned more than double the return of large cap stocks in
the 4th quarter alone, which pushed returns to be the best for the year.
The rally has pushed U.S. stocks to very high levels. Meanwhile, international stocks have not reached similarly high
valuations because those economies are not expected to rebound as quickly as the U.S. and emerging markets.
2
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 3 Yr 5 Yr
2019 2020 Stocks
2020 2020 2020 2020 Annual Annual
31.5% -19.6% 20.5% 8.9% 12.1% 18.4% U.S. Large Cap 14.2% 15.2%
30.5 -27.1 24.6 7.5 19.9 17.1 U.S. Mid Cap 11.6 13.4
25.5 -30.6 25.4 4.9 31.4 20.0 U.S. Small Cap 10.2 13.3
22.0 -22.8 14.9 4.8 16.0 7.8 International 4.3 7.4
18.4 -23.6 18.1 9.6 19.7 18.3 Emerging Mkt 6.2 12.8
What Happened to Bond Prices & Yields in 2020?
Following outsized returns in 2019, investors had low expectations for bond performance in 2020. However, investors
seeking safety from the stock market declines piled into bonds during the first few months of the year, despite the
already historically low yields. As demand for U.S. Treasuries soared, at the expense of riskier and less-liquid issues,
the U.S. government stepped-in to assist with trading issues. These actions stabilized bond markets, allowing riskier
segments to outperform as the year progressed. Lower short-term interest rates pushed yields on money market funds
almost back to zero and well below the inflation rate of 1.6%.
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Bonds & 3 Yr 5 Yr
2019 2020
2020 2020 2020 2020 Money Market Funds Annual Annual
8.7% 3.1% 2.9% 0.6% 0.7% 7.5% Taxable U.S. 5.3% 4.4%
5.1 -2.7 3.4 4.1 5.1 10.1 Taxable Global-ex. U.S. 4.2 4.9
6.4 -0.5 2.7 1.1 1.3 4.7 Municipal Intermediate 4.2 3.4
2.1 0.3 0.05 0.05 0.0 0.4 Money Market 1.5 1.2
The very good returns from bonds in each of the past two years surprised most investors and illustrated how
complicated these markets can be. Trying to guess the direction of bond prices is as difficult as trying to predict the
direction of the stock market. Evidence of how difficult it is to predict bond yields is illustrated by Bloomberg’s most
recent survey publication of a select group of 50-75 global economists. The results summarized below highlight that
even the most respected professionals often get the forecasts wrong as shown over the past 5 years:
U.S. Treasury Wall Street Difference Total Return
10-Year Economist Actual Right or Wrong In %Yield U.S. Bond Index*
% Yield Prediction
2020 2.0 0.9 Wrong -1.1 7.5%
2019 3.3 1.9 Wrong -1.4 8.7%
2018 2.9 2.7 Wrong -0.2 0.0%
2017 2.8 2.4 Wrong -0.4 3.5%
2016 2.7 2.4 Wrong -0.3 2.6%
A key to understanding how bonds perform is to know that there are two components of total return. One component is
the interest earned based upon the purchase price of the bond (yield) and the other includes changes in the price of the
bond. In 2020, despite the low yields already offered to bond investors, interest rates moved even lower around the
globe with the help of central banks. These moves pushed the prices of bonds higher as investors preferred the higher
yields of existing bonds versus the lower yields offered by newer issues.
The media often reference the performance of bonds by discussing the movement in yields. “Yields moved lower”
suggests to many savers that this move is a negative event when, in fact, bond holders benefit from prices moving
higher. In turn, if “yields moved higher” this means that bond prices moved lower.
An investor’s allocation to bonds is intended to provide income and principal stability and to offset the unpredictable
bouts of poor absolute performance of more volatile asset classes, as was evident in early 2020. The annualized return
of 8% for the past two years should not be expected in the future because the current yield of the U.S. bond market is
3approximately 1.5%. Given the commitment of central banks around the world to keep interest rates steady and low for
the foreseeable future, our expectations for client total returns from bonds in the next few years is much lower – maybe
only matching the rate of inflation.
What is Our Role as An Investment Consultant?
In our role as investment consultants, it is our responsibility to apply disciplined investment strategies, especially at
times when markets are under extreme pressure. We strive to provide insightful communications that explain our
investment strategy and the impact that geopolitical events, government monetary and fiscal policies, and economic
data have on the absolute and relative performances of client portfolios.
Although it is reasonable to think that many will prefer to forget the events of 2020, the year will be remembered for
new vocabulary words such as “pre-COVID-19”, “virtual”, “pod”, “superspreader” and “PPE” and new phrases
including “contact tracing”, “essential workers”, “social distancing”, “voter fraud” and “flatten the curve”.
SIA will remember 2020 as the year of putting extraordinary events into perspective while trying to eliminate emotion
from the investment decisions we implemented for our clients. In the spring, when the market suffered the swiftest bear
market decline in history, we shared our thoughts directly with clients through phone and virtual calls, and throughout
the year we provided our insights often through the email delivery of fourteen Constant Contacts® and with our
quarterly mailing of reports. As the year progressed, we focused on tax saving strategies for our individual clients and
conferred with institutional clients regarding stresses to their budgets and programs.
We will remember the year as one in which we excelled in our commitment to provide the highest level of investment
consulting services despite our own disruptions due to the impacts of the pandemic.
What is the Outlook for 2021?
During the final three quarters of 2020 gross domestic product (GDP) in the U.S. was estimated to be on pace to mark
the beginning of the next economic expansion after the quickest and steepest recession in living memory. Importantly,
in late December, Congress provided an additional $900 billion of fiscal stimulus spending, which was a boost to the
already improving growth rate of the U.S. economy.
With the help of better-than-expected effectiveness for multiple vaccines, the world has a tangible timeline of returning
to normal - a massive improvement over October’s hope, which was only a hope, for defense against the deadly
disease. Another fact that cannot be overstated is that trial data indicates a +90% effectiveness rate for a single vaccine,
which never guaranteed and certainly exceeded both Wall Street and economists’ expectations – let alone two vaccines
meeting the 90% threshold, and thus greater potential for catalyzing herd immunity.
While many economies may face a “W-shaped recovery” versus the “V-shaped recovery” in the U.S., according to
Bloomberg’s survey consensus in early December, the 2021 forecast for global growth is over 5%. This estimate was
made prior to the U.S. fiscal spending announcements (and the outcome of Georgia’s January 5th special elections
which increases the likelihood of further fiscal spending).
With this great news, and estimates that the timely distribution of these vaccines will be met, we list some baseline
economic expectations below:
Short term (1-year or less)
Barring the risk of virus mutations being resistant to the new vaccines, the headwind of COVID-19 restrictions will
meet a growing fiscal stimulus tailwind that should place the U.S. on track for growth. In contrast, Europe is
expected to have a contracting real GDP for the 1st quarter of 2021. In both the U.S and Europe, by summer there is
anticipation of lower mortality and subsequent boosts to consumer confidence as populations emerge from
quarantine restrictions. Similarly, resumption of outdoor activities should boost the most impacted service sector
employment levels and support further a return to normal. The expected improvements in worldwide economic
growth, by some measures, would bring 2021 results almost back to pre-pandemic trends by year-end.
Medium term (1-3 years):
While 2021 is expected to be the year of the recovery, 2022 is forecast to be the year of catching up to historic
growth trends accompanied by a return to slower growth thereafter. Potential risks to the base case of growth
include previously mentioned virus mutations, investor speculation creating pockets of inflated asset
prices, higher inflation (should the Fed’s average inflation targeting, and eventual tapering, resets meet
4resistance from investors), or higher corporate and individual taxes dampening expected growth rates. The low
interest rate environment, however, may harm savers and those risk-averse investors relying on income from
investments.
Long term (Greater than 3 years)
Three years from now, vaccine distribution is expected to create a world where herd immunity renders COVID-19
a distant memory and allows global trade talks and trade pacts to support a worldwide economic resurgence.
Because the U.S. and China make up over 40% of the world’s GDP, it is of great importance that they both exhibit
leadership to all.
Behind the Scenes at SIA
Throughout 2020, we used our firm’s resources to improve our value added as our clients’ investment consultant.
Highlights of actions we took in 2020 included:
1. Reminding clients that Congress passed legislation at the end of 2019 that impacted retirement accounts and
was named “Setting Every Community Up for Retirement Enhancement Act” (also known as the SECURE
Act). The Act’s impact affects retirement accounts because it:
raised the Required Minimum Distribution (RMD) age from 70½ to 72. This applies to individuals who
turn 70½ after December 31, 2019. Then, on March 27th, 2020, the CARES Act eliminated the requirement
to take a distribution in 2020 and our advice to use taxable assets for withdrawal needs saved many clients
a considerable amount of money in taxes.
requires that a beneficiary of a defined contribution plan (including, 401(k), 403(b) plans) or a beneficiary
of an IRA (both traditional and Roth) – who is not the owner’s spouse or minor child, or if the beneficiary
is not disabled or chronically ill, or less than 10 years younger than the owner – withdraw the entire
balance of the account within 10 years from the owner’s death. This new requirement eliminates the
beneficiary’s ability to stretch the withdrawals (and thus the income tax liability) over his or her life
expectancy. This applies to account owners who passed away after December 31, 2019.
2. Assessing accurately that the sell-off in stock markets worldwide early in the year would provide an
opportunity to take losses to offset future capital gains. In addition, during the downturn in stocks, we funded
any withdrawal needs using money market or bond funds that did not experience any losses. These strategies
allowed portfolios to rebound dramatically by year-end.
3. Remaining disciplined in our sub-asset allocations to include segments outside of the popular large cap growth
trade. This strategy provided some of the most powerful periods of outperformance witnessed in our careers
during the final two months of the year.
4. Recommending and facilitating the transfer of donations of appreciated securities to charities of clients’ choice
during these most stressful times for non-profits.
Cheers to a healthy and prosperous new year,
The Associates of SIA
____________________________________________________________________________________________________________________________________
*Benchmark Indexes used in this SIA Perspective include as asset class returns the Dow Jones Total U.S. Stock Market Index,
Barclays U.S. Aggregate Bond, Global Ex-US and Municipal Bond Index, U.S. Treasury Bill Index. For stock segment returns we
provide the S&P 500 Index, Russell Mid Cap and Small Cap Index, MSCI EAFE and MSCI EM Index total returns.
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