#Articles — 22.12.2020

A year of hope

Patrick Casselman, Senior Equity Specialist

Last week, the stock markets resumed their year-end rally on growing hopes of a US stimulus deal and a UK-European trade deal.

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The Stoxx Europe 600 index rose by 1.5% and the S&P500 by 1.25%, enough to reach a new record. Both technology and traditional cyclical stocks (automotive industry, materials, etc.) were up, while defensive sectors lagged somewhat (telecoms, health care, food, etc.). Hopes of an economic recovery also led to an ongoing increase in oil and commodity prices. In the face of this strong risk appetite, bond prices and the US dollar lost some ground.


A year of marked contrasts


Certainly, few of us will be sad to turn the page on this unprecedented year. At the time of writing there are 75 million recorded Coronavirus contamination cases and 1.7 million deaths worldwide. Most countries have suffered the deepest economic recession in history, coupled with a surge in unemployment. Due to the recent spike in Coronavirus cases and new lockdowns, many sectors remain at a standstill (including tourism, hospitality, events, etc.). And although the start of vaccine programmes are providing hope that everything will return to normal by around mid-2021, economists warn that it will take more than a year before we see a full turnaround after this hard blow.


By contrast, most stock markets have posted decent gains, with the US markets even reaching record highs. A quick summary: the American S&P500 index has posted a gain of +15% this year, but was recently overtaken by the Russell 2000 small caps index (+18%). And given that many technology companies have been riding the wave of the “stay at home” trend, the Nasdaq has posted an impressive 42% increase in 2020. Asia's stock markets are not doing badly either: the Chinese, Indian and Japanese stock markets have chalked up gains of 13%. The European stock markets are a little behind, still posting an average of 5% losses, but started to pick up in recent months. Meanwhile, the German and Dutch stock markets have recovered to positive territory since the beginning of the year. The worst performers are the Southern European markets (e.g. Spain: -15%) but also the UK       (-13%, weighed down by Brexit uncertainty).


Stock markets are driven by hope and liquidity


However, it has been a bumpy ride this year. From mid-February to mid-March, most markets recorded the biggest fall in history (-35 to -40%), recovering almost as quickly in subsequent months. Interest rates hit unprecedented lows, and the oil price was even negative at some point. The equity, oil and commodity markets recovered more than expected, particularly thanks to the surprisingly rapid economic recovery in China (it was remarkable how well the Chinese managed the pandemic) and to the record stimulus packages of central banks and governments. Corporate earnings fell less than feared, which naturally helped too. Owing to the support of authorities (e.g. furlough schemes), companies drastically reduced their costs. And the watchword “stay at home” even gave a significant lift to numerous technology and e-commerce companies. Above all, the markets were driven by hope. Indeed, hope that vaccinations will stamp out the pandemic in 2021 as well as hope of additional stimulus measures, economic recovery, political agreements and so on.


Finally, an American agreement on stimulus measures


Last week’s highlights: although the number of Coronavirus contamination and death numbers peaked in the US and several countries announced new lockdowns, the markets rose on growing hopes that political agreements would be reached: a new stimulus package in the US, between Democrats and Republicans, and in Europe, a new trade deal between the UK and EU. After more than six months of negotiations, an agreement was finally reached in the US over a new stimulus package to the tune of USD 900 billion, following the previous (already spent) package of USD 2,200 billion. This one includes fresh support for small businesses, a second round of cheques for individuals, a supplement to federal unemployment benefits and funding for local state programmes. These measures will support the economy until March 2021.


But no white smoke yet for Brexit


Turning to the trade negotiations between the UK and Europe, progress was made last week on the handling of disputes and a level playing field for business (social and ecological legislation do not differ too much) but fishing remains a thorny topic for negotiators. Talks will continue this week.


How are the markets digesting a new strand of the Coronavirus?


This week, all eyes will be on the new strand of the Coronavirus, which is even more contagious than previously, and for the moment is mainly affecting the United Kingdom.  London and the South-East region of England are completely locked down and various countries have temporarily closed their borders with the United Kingdom. The main question is whether the existing vaccines are as effective against the new Coronavirus. The answer is probably yes, but this still needs to be proved. Amid this uncertainty, the markets may start to post a correction before year-end until uncertainty recedes again and hope picks up.