Daily Brief: The Economic Trends That Defined 2020 And How They Shaped Markets

Daily Brief: The Economic Trends That Defined 2020 And How They Shaped Markets

about 3 years ago3 mins

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This was the year the entire economic universe revolved around the astronomical effects of one microscopic virus.

What does this mean?

When coronavirus first broke out in China, economists’ first worry was that it would disrupt the global supply of goods. If all those “made in China”-labeled products weren’t being made in China, after all, global growth might falter. They needn’t have worried: a drop in supply isn’t exactly an issue if there’s a collapse in demand too. With the virus locking the whole world down soon enough, shoppers suddenly weren’t buying their usual products any more – and the global economy took a nosedive.

World stocks vs. COVID-19 confirmed cases

Enter the world’s central banks and governments, which promised to do whatever it took to cushion the blow. Central banks’ support came in the form of interest rate cuts and bond-buying programs, both of which aimed to encourage businesses and individuals to borrow – and then spend – more money. The government, meanwhile, slashed taxes, while also handing out relief payments to anyone who was forced out of work.

Policy rates, 2006-20

Why should I care?

For markets: Everybody hurts.

The pandemic’s spread has had a massive impact on the job market. While the US unemployment rate has more than halved since the first coronavirus wave hit in spring, there are still ten million more Americans looking for work than there were before the outbreak. And since workers are the building blocks of an economy, a dwindling number of them risks economic growth next year and beyond.

US unemployment

The bigger picture: A long road to recovery.

At the height of the first wave this spring, the US economy shrank by a record 33% annualized rate in the second quarter, the eurozone by a comparable 36%, and the UK by 60%. And even with vaccines now in play, the IMF reckons it’ll take the whole of 2021 for the global economy to bounce back to pre-pandemic levels.

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How 2020's Economic Trends Shaped Markets

Micro review image

As governments and central banks scrambled to manage their economies, investors were just scrambling to place a wager on record-breaking global stock and bond markets.

What does this mean?

Global stocks had a scare when Covid-19 first hit, falling more than 20% from their previous high into a “bear market”. But they bounced back with a vengeance when tech stocks – which account for roughly a quarter of the US stock market – got a boost from pandemic-driven trends like remote working and online shopping. By the end of the year, Chinese stocks were up 25% and US stocks were up 15% – while tellingly, Europe’s less tech-heavy markets were down 5%.

Bonds had a good year too: their prices climbed and yields dropped as central banks bought them up in their droves. So much so, in fact, that a record $18 trillion of government and corporate bonds offered negative yields by the end of the year. In other words, investors wanted them even though they were guaranteed to lose them money…

Global supply of bonds with negative yields hits record $18 trillion

Why should I care?

For markets: Whose high is it anyway?

No sooner have investors digested today’s goings-on than they try to put a price on next year’s potential, which might partly explain stock markets’ recent record highs. 2021, after all, should be ripe for a dramatic bounce back: analysts are expecting average US company profits to grow by 22% – which, if proved right, would be the highest profit growth on record since 2010.

S&P 500 earnings & revenue growth: 2015 - 2021

The bigger picture: The big rotation.

There was a lot of debate this year around when cheap-looking “value” stocks – in bruised sectors like cars, energy, and banking companies – would overtake “growth” stocks like those of Big Tech. And the widespread rollout of the vaccine could be that “when”: it’s already given investors more confidence in a growth rebound next year, which has historically been most beneficial to economically sensitive value stocks.

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