US Economy: Growth likely in 2021.

Economic data has gradually improved: home prices in the United States are up 8% year on year, and manufacturing expectations are at a 6-year high, while the Federal Reserve raises its growth prediction for 2021. Nonetheless, worrying trends in retail sales (-1% in November) and consumer confidence (the lowest since August) imply that the current Covid-19 relief package may be arriving just in time.

US Stocks: Small stocks, biggest gains.

Equities had another solid positive month in December. Most notably, after a three-month rise to end the year, small-cap shares have surpassed their large-cap rivals for the entire year of 2020. While cyclical, value-oriented small stocks have led this latest surge in anticipation of an economic reopening in 2021, growth stocks have outperformed value stocks for the year.

Foreign Stocks: Weak dollar help

Non-US shares performed well as well, with emerging market stocks rising more than 7%. For the year, a lower US currency kept developed market returns from being flat, whereas Asia drove emerging market returns, which returned about 30 percent due to the quick Covid-19 economic rebound in China and Korea, as well as those markets' tech and consumer emphasis.

Fixed Income: Inflation worries push up yields.

The yield on 10-year Treasuries concluded around 0.1 percent higher than where it ended November, as equities markets rebounded. TIPS outperformed in the face of rising inflation expectations as a result of increased government spending. Corporate bonds did well as well, with projections that defaults peaked at 9% in summer 2020 and will begin to decline in 2021.

Real Assets: Commodities in demand.

Commodities topped asset class returns at the end of the year, lifted by optimism around economic reopening, and substantial buying of raw materials by China driving robust returns. Copper and iron ore contracts were notably strong performers reaching multi-year highs in that category while the price of oil also rose nearly 9%.

Alternatives: Managed futures lead.

Trends leveled out in November, paving the way for excellent managed future performance this month. Among these consistent trends, the weakening of the US currency, increasing equity markets, and commodity recovery were the most important variables in results across strategies. The whole hedge fund space is still benefiting from the financial market recovery that began in March.

Our Take

The reality is more complicated as we celebrate the start of a new year and the end of (by most accounts) a miserable one. While the daily impact of Covid-19 appears to be diminishing as vaccines are distributed to local jurisdictions until the end of 2021, our war with the virus remains a major issue in the months ahead. We've gone over virus containment, "flattening the curve," and treatments in order. So far, efforts to tackle the virus have been haphazard, with less-than-ideal results. Nonetheless, markets progressively rebounded during the year, and investors are now debating big gains against losses.

We should expect reports about vaccine distribution and effectiveness to influence daily market movements, especially since what appears to be a best-case scenario has already been included into stock market prices. The United States' failure to vaccinate its citizens is most likely the greatest risk to financial markets today. Politics will also be a source of uncertainty, with the breadth of a progressive Biden administration and sustained economic stimulus in doubt. The outcomes of the Georgia Senate run-off elections, on the other hand, will provide some clarity.

Looking Ahead

Overall, as we flip the page to 2021, our outlook remains positive, and we are continuing to consider changes to improve portfolio risk-adjusted returns. As previously said, most economic data point to a prolonged recovery, albeit at a slower rate. Furthermore, elements that have recently deteriorated, such as crucial U.S. consumer spending, should get a "shot in the arm" from nearly $900 billion in new Covid-19 aid, which extends federal jobless benefits through March and offers $600 in cash to most Americans. There are signals of significant pent-up demand in travel, hospitality, and entertainment on the horizon, providing we can bridge the short-term gap and reopen these sectors.

In general, we propose expanding or maintaining higher equity investments at the expense of fixed income in the future. While several equities had a good year in 2020, some recovered more slowly and are better positioned to generate returns in 2021. Infrastructure assets are among those that provide diversity, generally good values, long-term growth potential, and some protection against inflation should it rise unexpectedly. We also see opportunities in alternative assets like private equity and debt, which we believe will be major return drivers for portfolios in the coming years.