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The prospects for widespread vaccinations for COVID-19 are providing a welcome dose of optimism that the economy will be able to fully reopen in 2021. Strong corporate earnings data, hopes for further stimulus, and continued high levels of global liquidity are also boosting investor sentiment and demand for equities and other risk assets. Low bond yields also continued to push investors into stocks and risk assets in general, given the higher probability for these investments to generate positive real returns in the short-to-intermediate term compared with many bond sectors.

In addition to providing a comprehensive review of the economic and investment landscape in this issue of Key Investment Perspective, we explore a trend that could have a lasting impact on investment markets: the increase in institutional acceptance of crypto assets, specifically bitcoin (BTC). While we do not recommend allocations to crypto assets or BTC at this time, we view BTC as a hybrid of a speculative asset with perceived scarcity and an alternative store of wealth. We will continue to analyze crypto assets for prospective use in portfolios.

Key Takeaways

  • Equities: US equities increased 4.5% in December following a strong rally in November, bringing 2020 returns to 20.9% as measured by the Russell 3000 Total Return Index. Small caps continued to outperform in December, as did growth stocks. International developed markets increased 5.4% for the month and 10.0% for year, while emerging markets rose 6% for the month and 15.5% in 2020.
  • Fixed Income: US corporate bonds continued to outperform Treasuries in the month as economic and corporate prospects improved. US investment grade corporates increased 0.4% in December and 9.9% for the year compared with -0.2% for the month and 8.0% in 2020 for US Treasuries. The current level of yields suggests that bond returns are likely to be low for the foreseeable future.
  • Tactical Asset Allocation: We continue to favor equities relative to bonds and recently neutralized our equity allocations to US equities vs. international equities after favoring the US for its defensive characteristics. We are initiating a position in a diversified portfolio of real assets and further underweighting bonds, and we continue to emphasize credit-oriented sectors within fixed income and alternative-oriented strategies for suitable investors.