You may not realize this, but 2020 was a good year for stock investors.

Might seem hard to believe, but it’s true. Although the S&P 500 Index was down more than 30% at its low point in March 2020, it ended 2020 with a solid 18.4% total return.

Last year marked the first time the S&P 500 ended a year in the positive after being down at least 30% during the year. Gains were driven primarily by the emerging economic recovery taking hold — bolstered by massive stimulus — and the remarkably fast COVID-19 vaccine development that encouraged market participants to begin pricing an end to the pandemic into stocks.

Throughout the highs and lows of 2020, several asset classes and sectors were winners — and there were a few losers too.

Massive growth outperformance

The growth style of investing had one of its biggest runs ever relative to the value style in 2020, benefiting from better positioning for the pandemic, superior corporate earnings growth, and balance sheet strength. The major growth indexes returned more than 30% while the value indexes produced mid-single-digit gains.

The technology sector was the biggest driver of growth outperformance — about 60% of it. Consumer discretionary — led by Amazon, one of the biggest stay-at-home stocks — also outperformed the broad markets and value indexes by a wide margin in 2020.

 “We maintain a slight preference for growth but have become more interested in value stocks as the outlook for economic growth has improved,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “The additional fiscal spending we may get from the Democratic-controlled Congress adds to the case for value by boosting interest rates and supporting financials.”

Technology topped all sectors

Technology led all S&P 500 sectors in 2020 by a wide margin with a nearly 44% return. Remove the sector from the S&P 500 performance, however, and last year’s 18.4% gain would drop to around 6%. As you might imagine, the work-from-home / stay-at-home environment provided a big boost for the tech sector last year.

We continue to like the sector’s prospects in 2021, given the solid earnings outlook and powerful secular tailwinds such as 5G, cloud computing, mobile payments, and artificial intelligence.

Small cap comeback

When the United States entered a recession and stocks plummeted in March 2020, it was no surprise that small cap stocks underperformed. Small caps generally are more economically sensitive, domestic by nature, and less able to withstand economic and market stress than larger cap companies. But small caps stormed back as confidence in the economic recovery increased, and the small cap Russell 2000 Index had its best quarter ever in Q4 with a 29.3% gain. Small caps actually slightly outpaced the large cap S&P 500 Index for the year.

We upgraded our small caps view in September because they tend to do well early in economic cycles, and we expect solid gains for small caps again in 2021 as the recovery gains steam.

Rough year for energy

Energy was the biggest loser in 2020, with a decline of more than 30%, which was more than 10 percentage points worse than the next worst sector—real estate. You probably don’t need to look any further than the 20% decline in crude oil prices to explain the weakness, but sensitivity to travel added to the sector’s woes. Crude oil’s rally back to pre-pandemic price levels in the range of $50 per barrel and related improvement-in-sector performance are encouraging, but we’re staying cautious for now.

Developed international

Developed international stocks lagged in 2020, based on the MSCI EAFE Index, due mostly to weakness in France, Japan, and the United Kingdom (UK). These countries lack the technology exposure that the US indexes enjoy, and for that reason their markets were hit harder by the pandemic. Meanwhile, the “Brexit” drama (the UK leaving the European Union) added to the UK’s challenges.

Emerging markets fared much better than developed international markets, roughly matching the gains for the US indexes. Emerging markets owe their strength to China, which led the world out of the global pandemic, as well as South Korea and Taiwan.

Remember, the stock market is forward-looking and is not emotional. Even back in March 2020, early in the COVID-19 crisis, the stock market was looking ahead of the economy and began to respond to what it saw as positive signals from corporate America. 2021 may be looking forward to better times as well.

For more of LPL Research’s 2021 market insights and economic forecasts, read the LPL Research Outlook 2021: Powering Forward.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch

This Research material was prepared by LPL Financial, LLC.

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