As we turn the corner of another year, I was brought back to the famous speech given by Teddy Roosevelt, “The Man in the Arena”. A very inspirational address given in Spain in 1910 recognizing that it is those who are in the arena that deserve accolades and not those on the outside looking in (my paraphrase). I believe 2020 put all of us in the arena whether we wanted to be there or not. I am thankful and grateful for family, friends, and to all of you as we continue to walk through this time together.
As we close out 2020, we are witnessing a recovering market with expectations of a rebounding economy. The volatility we experienced in 2020, while not historically large for a bear market pullback, was nonetheless unpleasant at the beginning of the year, turning into a move up on economic optimism towards the end of the year. Equity returns in 2020 were very segmented. The difference in performance between growth and value stocks was wide. Large Cap value indices barely turned positive and we had multiple sectors like energy and finance come in with negative returns.
For 2021, the leading economic indicators we are tracking still point to an economy on the mend that will eventually lead to expansionary growth by the end of the year. The market is not cheap at these levels; however, current valuations may be deserved as global central banks remain very accommodative and interest rates remain low. There are still headwinds, as you can imagine. These risks include potential COVID responses, tensions between the U.S. and China (technology and over the South China Sea), and the usual geopolitical hotspots. Perhaps glaringly absent from my list is political tensions in this country. We anticipate that once the new administration is sworn in, loose fiscal policy will continue to fuel our economic growth. Regardless of Congressional legislation, we remain bullish on the ability of corporations to adjust to a changing tax and regulatory environment.
As for interest rates, we believe 2020 saw the bottom. It is likely rates will slowly climb from here in the coming year driven by the prospects for inflation. Unfortunately, this means that a nominal increase in rates will not translate into a real increase if this scenario plays out. Additionally, we expect the U.S. dollar to continue to weaken against other currencies. This is neither good nor bad, however the trend will lead us to look to adjust some of our fixed income investments. Longer term, a weakening dollar should lead to greater exports which would help the U.S. economy.
Within our portfolios the emphasis is still the same. We look to utilize companies with strong balance sheets, and growth profiles that are stable. For dividend-paying companies, the ability to continue to grow their dividends is a focus. We expect to see a rotation out of the overvalued areas that did particularly well last year, while experiencing a broadening of the returns across sectors and industries as started in the fourth quarter. International and emerging markets may once more become attractive. In summary, as the U.S. and global economies continue to recover, there are opportunities and risks we that will navigate carefully.
If you have any questions please do not hesitate to contact us. As always, we thank you for your trust.