By Philip Lawlor, head of Global Investment Research
Global equity markets rode the COVID-19 shockwaves from panic to a record-breaking finale in 2020, capping a year of economic trauma and dramatic reversals in risk sentiment and market leadership.
With many markets hitting new or multi-year highs, the FTSE All-World Index ended 2020 up 14.4%. But this achievement belies the massive gyrations that world markets endured over the course of the year, powered by huge swings between risk-on and risk-off forces.
Here we highlight four notable features of equity market behavior in 2020.
Source: FTSE Russell. Data through December 31, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.
As depicted above, 2020 equity performance can be divided into five distinct phases:
- Early optimism (Jan–Feb 19) Global equities rise 3.8% in early 2020, despite a virus outbreak in China and other parts of Asia.
- Covid-19 sell-off (Feb 19‒Mar 23) The trigger: surging COVID-19 cases in Italy. Virus spreads rapidly; lockdowns bring world economy to a standstill; stocks in freefall; 10yr US and UK bond yields fall below 1% for first time ever.
- Policy-fueled recovery (Mar 23–Sep 2) Central banks launch aggressive monetary intervention, while governments pass massive fiscal rescue packages.
- Second-wave fears (Sep 2–Nov 11) The resurgence in new COVID-19 cases raises doubts about the economic recovery and stirs market volatility.
- Vaccine hopes & more policy support (Nov 11–present) Risk rally accelerates, spurred by new rounds of monetary and fiscal stimulus, US election results and positive vaccine news flow.
#2 – US stocks lead the global pack
Despite suffering steeper losses in the March panic and again in the September/October correction, the Russell 1000 finished 2020 with a threefold lead over its global peers (up 21% versus 6.8%, respectively). Much of this full-year outperformance occurred in early stages of the post-lockdown relief rally, when the US large-cap index rallied at twice the pace of the rest of the world, reflecting the haven status and perceptions of its relatively stronger recovery prospects of the US economy, as well as its heavier weightings in technology and other COVID-lockdown outperformers.
Source: FTSE Russell. Data through December 31, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
#3 – Valuation expansion a key driver
As was the case globally, P/E multiple expansion, rather than dividend or forecast EPS growth, dominated US total returns in 2020, as the decomposition below illustrates.
Source: FTSE Russell. Data as of December 31, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
#4 – US tallies the most concentrated return contributions
US outperformance also benefited from a much higher concentration of gains among its largest stocks by market capitalization. As the chart below shows, the contributions of the largest 15 US stocks accounted for nearly all of US returns, twice the share of the market with the next best record, in the FTSE Asia Pacific ex Japan. Return contributions of the largest stocks were the weakest in Europe ex UK and negative in the UK.
Source: FTSE Russell. Data as of December 31, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
This article first appeared on Jan. 5 at the FTSE Russell blog.
Photo Credit: herval via Flickr Creative Commons
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