January 2021
By Darren Nyce, CFA
Senior Research Analyst, Castle Investment Advisors®, LLC

2020 unfolded to be an extraordinary and challenging year. While this letter strives to paint the picture of the economic and investing landscape, we acknowledge the reality of the human toll of a worldwide pandemic and grieve with those of you who have suffered losses. Several of our Castle staff did contract COVID-19, but fortunately with only relatively mild cases and all seem to have recovered well. We are optimistic about the effectiveness of the vaccines that are being made available and look forward to entering a post-pandemic world.

This chart highlights some of the major events of 2020 along with the stock market’s performance along the way.

1st chart croppedData from 1/1/2020 - 12/31/2020 Source: ICI, FactSet, Avantis Investors.

After a severe recession that produced the worst quarterly GDP number on record in Q2, growth surged in the third quarter to post the best quarterly GDP number on record. This bounce in output recovered only a portion of what was lost economically (see the trend line in the chart below), largely because of the importance of the service sector on the U.S. economy, which obviously has not fully participated in the recovery, at least not yet.


Uncertainty remains about both the path of the recovery in the short term and the long-term changes to a post-pandemic economy. Inevitably, the depth of the crisis will leave some scars that will likely take some time to heal. But as we eventually enter post-pandemic life, we expect the combination of pent-up demand and pent-up supply in those areas that have been most impacted to lead a surge in growth. Here’s to hoping this is sooner rather than later.

A good example of this partial recovery is visible in the jobs reports. While the unemployment rate has come down to 6.7% from an April high of 14.7%, this measure is slightly tainted because of a meaningful drop in the labor force (the number of people who are working or looking for a job).

schwab chartSource: Schwab.com

There are currently 7.1 million people who want a job, but are not in the labor force; this was less than 5 million pre-COVID. Meanwhile, weekly jobless claims remain stubbornly above 700,000. While many industries are reporting employment gains, the majority of the job losses continue to be in the Leisure and Hospitality sector (see chart below).

December Diffusion

While many large companies have been able to weather the storm, many small businesses continue to struggle. Business schools teach leaders to pay attention to their Key Performance Indicator (KPI). Many small business owners stand in agreement with Mitch Daniels, President of Purdue University, when he says “My KPI is KPO. Keep the place open.”

But in the midst of these headwinds, the stock market has reached all-time highs.

Index    4th Qtr 2020      
1 Year
3 Year
5 Year
S&P 500 12.1% 18.4% 14.2% 15.2%
Nasdaq Composite 15.6% 44.9% 24.4% 22.1%
Russell 2000 – Smaller Companies 31.4% 20% 10.2% 13.3%
MSCI EAFE – International 16% 7.8% 4.3% 7.4%
Barclays US Aggregate Bond 0.7% 7.5% 5.3% 4.4%

For the year, technology was the leading sector, up 42.2%, while energy was the worst performer, losing 37.3% (energy had a strong December or its 2020 showing would have been even worse). The S&P 500 was dominated by just a handful of companies – the top 5 companies rose 49%, while the remaining companies gained only 9%. There were 81 IPOs with a combined value of $28.5 billion, the highest since 2000.

Much of the market’s return over the past two years has been due to an expansion of the P/E multiple (the stock price divided by the company’s earnings). In January 2019, the market P/E was 14.6; it is currently 22.3. Historically low interest rates justify a certain amount of increased valuation, but markets typically do not grow much from multiples that are this high. In the past few weeks there have been many positive pre-announcements from companies about their earnings expectations. If this comes to pass, there should be some compression in the P/E ratio. In the meantime, we remain cautious.

We will be watchful to see what potential changes arrive with a new presidential administration. Current signals based on discussed legislation and cabinet appointments do not indicate any draconian changes are imminent. Most economists see an offset between the growth from expected additional stimulus and the drag that will be experienced by higher taxes.

It has been a wild ride in the past year, one that reminds us of the unpredictability of market actions in the short term. We continue to believe the best course is to stay diversified and keep big picture goals in mind. With high stock valuations, we are tilting defensively; however, bonds are not looking cheap either, so we are trying to be selective. We know there will always be a certain amount of uncertainty, but we are committed to acting in our clients best interests as we take the journey together.

Here’s to a great 2021! May all of your actions this year be marked by kindness and respect.


Tax, legal, and estate planning advice contained in this article is general in nature. Always consult an attorney or tax professional regarding your specific legal or tax situation. This article was prepared for informational purposes only and does not constitute an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Information presented does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information regarding products and services. It should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Any strategy discussed herein may not be suitable for all investors. Before implementing any strategy, investors should confer with their financial advisor. No current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels.