Quarterly Commentary

December 2020


The economic recovery continued into the fourth quarter despite a surge in COVID-19 cases and renewed lockdown measures. Risk assets had fairly robust returns that were supported by vaccine approvals, clarity on the presidential election, and additional policy stimulus. Central banks around the globe and fiscal policymakers reaffirmed their commitment to supportive policy which further added to market and economic stability.

In equities, the fourth quarter experienced a rally across all markets and capitalizations. Emerging markets surged 18.4% on news of a vaccine approval and ended the year up 17.0%. Small-cap (+31.4%) and mid-cap (+19.9%) equities also advanced on the prospect of improving domestic economic data. Developed international equities also participated in the rally, finishing the quarter up 16.1%. Domestic large-cap stocks experienced a bit of a cyclical rotation during the quarter in previously underperforming sectors such as Energy and Financials. The S&P 500 gained 12.2% during the quarter and finished the year up 18.4%.

Equity Performance – 4th Quarter 2020

Equity Performance

While growth stocks continued to outperform on a year-to-date basis, the fourth quarter experienced a  directional change as value stocks outpaced growth by a substantial margin (16.25% vs 11.39%) Analysts began to wonder if this was the beginning of a longer-term trend reversal. The pandemic and the migration to work from home/stay at home accelerated innovations and resulted in enhanced momentum for many companies, especially technology-focused firms. As valuations moved to historic highs (i.e. price/earnings ratios), it seems a reversion to the mean was inevitable. At some point, undervalued companies will see a reversal in trends as the economic environment that has been the driving force behind growth stocks will cease to exist. The timing, however, is highly uncertain. With accommodative monetary policy and record fiscal stimulus, the more plausible scenario would be a contraction in valuations for growth stocks and the diversion between growth and value returns narrows. With equity markets at all-time highs and valuations stretched, a pullback in stock prices would be expected. The timing and degree are difficult to pinpoint. Well diversified, lower volatility portfolios which maintain exposure to both growth and value styles, allowing uncertainty to be managed, will be the prudent strategy.

Sector Performance

The fourth quarter experienced a bit of a rotation as sectors that had been out of favor since the implementation of the nationwide coronavirus quarantine in March came back into favor. Financials is one such sector. As we entered March and it became clear that drastic measures would be required in an attempt to limit the spread of Covid-19, the Federal Reserve lowered their benchmark Federal Funds rate from approximately 1.60% to a range of 0.00% to 0.25%.

This generally has a negative effect on the profitability of financial institutions. In addition to this, the sudden decrease in economic activity also hurt the financial sector. As other sectors of the market recovered during the second and third quarters, financials lagged. During the fourth quarter, this reversed as the financial sector gained 6.30% in December and 23.12% during the quarter. Another sector the experienced a rebound during the fourth quarter was energy. WTI Crude has been on a wild ride since its most recent high of just over $63 per barrel in January 2020. By mid-April, WTI had dropped to $17 per barrel, after which it began a steady climb to close the year at over $48. Naturally, the Energy sector, which largely constitutes the drillers and refiners, was negatively impacted. In addition to a dramatic decrease in demand for refined products, the energy sector has been facing significant headwinds from the push for renewable energy sources. During the fourth quarter, investors realized how undervalued energy stocks were relative to other sectors which resulted in a gain of 4.51% for the sector in December and 28.27% for the quarter. Other sectors that performed well during the quarter were industrials (+15.51%), materials (+14.32%), and communications (+13.79%). Industrials and materials rallied on the back of improved second and third-quarter economic data while the communications sector performed well based on the fact that many employees who can work remotely continue to do so. Sectors that lagged the broader market over the quarter were utilities, real estate, consumer staples, and consumer discretionary which each had single-digit gains.

As for the calendar year, it was once again a story of growth overvalue. Technology led the way with a one-year return of 43.61% followed by consumer discretionary (+29.63%), communications (+26.91%), and materials (+20.52%). Many of the companies in these sectors benefitted either directly or indirectly from the changed environment due to the Covid-19 restrictions. Three of eleven S&P 500 sectors were negative on the year, those being energy (-32.51%), real estate (-4.68%), and financials (-1.67%). Real estate in particular may prove to be troublesome as many companies re-think their need for commercial office space. REITs that are well-positioned in warehouse and fulfillment centers may find themselves in a stronger position.

Sector Performance

Sector Performance

Fixed Income Markets

Fixed income markets performed well during the fourth quarter and ended the year in positive territory. Emerging markets’ debt was the top performer for the quarter and developed, international fixed income posted double-digit returns for all of 2020. Credit spreads, yields relative to the US Treasuries, narrowed as optimism return to the market complemented by stronger technical data. This was a reversal of what we experienced in the first quarter where investors sold investment-grade, high yield, and emerging market debt in favor of U.S. Treasuries and U.S. agency bonds.

Fixed Income Performance

Fixed Income Performance

Over the past 10+ years, fixed income assets have provided above-trend returns, as economic conditions and accommodative monetary policy helped move interest rates lower. On a total return basis, investment-grade bonds (represented by the Bloomberg Barclays U.S. Aggregate Index) have posted positive returns in 9 of the past 10 years. This pattern seems to have given investors a distorted sense of security and skewed their perspective on the fundamental purpose for investing in bonds. CWM has repeatedly emphasized the reasons to invest in fixed income securities: to reduce portfolio volatility and generate a dependable level of income. While price appreciation is the goal for owning most asset classes, the recent performance in fixed-income securities has allowed investors to enjoy the best of both worlds. With yields near historic lows, the question arises: What will the fixed income landscape look like going forward?

The economy saw an influx of fiscal (and monetary) stimulus in 2020, with the most recent $900 billion COVID Relief Bill approved at the end of December which will provide additional financial help to individuals and small businesses during these unprecedented times. And more recently, President Biden has proposed another $1.9 trillion package to provide bigger stimulus checks, more aid to the unemployed, additional support for small businesses and state and local governments, and increased funding for vaccines and testing. Assuming a substantial portion of this is approved and appropriated, economic growth could take hold and the recovery gains traction in the second half of 2021. With stimulus driving growth, household savings rates at all-time highs, and excessive pent-up demand, prices on goods and services could move higher and faster than anticipated, elevating inflationary pressures and pushing intermediate and longer-term bond yields higher.

But the short end of the yield curve is controlled by the Federal Reserve, and in the most recent comments by ChairmanPowell, he stated the pace of economic activity and employment have moderated;  December was the first month to record job losses since May. With that being said, it seems likely the Fed will stay on its current path, keeping short rates near zero and its balance sheet expanding. In fact, the Fed recently established new guidance pledging to maintain its current pace of purchasing $120 billion in monthly Treasury and mortgage-backed securities until “substantial further progress” is achieved in employment and inflation goals.

Fed’s Balance Sheet

Fed's Balance Sheet

Powell also emphasized that letting the economy run a little higher than a 2% inflation rate target was possible, resulting in a long term average of 2% (currently inflation is running approximately 1.4% on a year over year basis, measured by the Consumer Price Index.) With anchored short rates and stimulus moving long rates moderately higher, the yield curve should continue to steepen. With keeping short term rates low and maintaining the high level on bond purchases, the goal of these policies is to suppress large increases in longer-term yields. The bond markets have experienced a rise in the 10-year Treasury since the election and as long as the increase is moderate and orderly it is healthy for the economy. The bond market is historically an accurate predictor of economic growth and the rate at which prices rise, and more recently, the bond market appears to be pricing in the potential for higher demand, rising prices, and increasing yields. But with the Fed in play, the degree to which rates rise seems minimal. All of this is dependent on the rate at which COVID-19 vaccines can be distributed and the consumer returns to more normalcy.

Bonds continue to be an attractive investment. As state above, fixed-income investments provide safety and security not found in other asset classes and are still the best diversifier and complement to equities and a balanced portfolio. However, the returns of the past decade will be difficult to repeat.

Of course, all is dependent on the health outcomes. It is critical to get vaccines distributed evenly across the board and for the consumer to feel confident in their ability to move around freely and without fear. The timing and pace of the recovery are reliant on this outcome. Finally, we strive to be absolute and pragmatic in our comments and at all times unbiased in our professionalism. But we would be remiss not to acknowledge the unprecedented events of the past year. While we share in the concerns that these events have caused, we remain steadfast in our investment philosophy and our dedication to our clients. Whether it is sustained shutdowns and the potential long term effects on our country, civil unrest, or circumstances surrounding the Presidential election, we all will continue to focus on our clients’ long term goals and objectives and our fiduciary responsibility.

Elizabeth D. Swartz
Brian T. Moore
December 31, 2020



  1. Equity Performance - Fourth Quarter 2020 Morningstar: asset class
  2. Sector Performance – Fourth Quarter & Year to Date 2020 Morningstar: S&P 500 Sector Index
  3. Fixed Income Performance – Fourth Quarter & Year to Date: 2020 Bloomberg Barclays Index
  4. Fed’s Balance Sheet – Federal Reserve Economic


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