as of December 30, 2020
Following a strong economic rebound during the summer, the global economy slowed during the fourth quarter, as pandemic-related restrictions gradually returned to most major regions. However, the restrictions have been more targeted and the economic impact has not been as severe as in early 2020. The approval and distribution of multiple COVID-19 vaccines helped investors to look past the slowing recovery toward a potential rebound in activity later in 2021. This helped to drive strong gains for equities and other risk assets.
In the US, Congress reached agreement on a new $900 billion stimulus package, providing aid to individuals and businesses, following the expiration of many provisions of the CARES Act. The Federal Reserve committed to maintaining its bond buying program until the economy reaches full employment. The Fed also kept short-term borrowing rates near zero and has indicated that it expects to keep rates near zero until at least 2023. Fiscal and monetary measures have been an important tool in cushioning the blow to households and businesses, helping to provide a bridge to widespread vaccine distribution.
Global equities extended their rebound during Q4, with the MSCI ACWI Index, a measure of the global stock market, gaining 14.7% for the quarter and finishing the year with a 16.3% gain. The S&P 500 returned 12.1% during the quarter, lagging most other developed markets. Year-to-date, the S&P 500 returned 18.4%. International developed stocks rose 16.0% in Q4 and 7.8% during 2020. A weaker dollar added 460 basis points to US dollar returns during the quarter. Emerging market equities rose 19.7% in Q4 and finished the year up 18.3%. Asian emerging markets drove the gains for 2020, returning 28.4%.
Within fixed income, the Bloomberg Barclays Aggregate returned 0.7% during Q4, with corporate bonds outperforming Treasuries. The yield curve steepened during the quarter, with 3-month yields basically flat, while 10- and 30-year yields rose by 24 and 19 basis points, respectively. Investment-grade corporate bond spreads fell an average of 40 basis points during the quarter to 1.0%, which is roughly 30 basis points below the long-term median level. High yield bonds gained 6.5% during the quarter, as credit spreads fell by 160 basis points to 3.6%, over a percentage point below the long-term median level of 4.7%.
The approval of vaccines gives us greater confidence in a rebound in 2021, although our base case remains that global GDP will not fully recover to pre-COVID-19 levels until late 2021. The composition of global growth across countries and sectors is likely to be uneven from here. In the US, the Democratic sweep suggests that additional fiscal support is likely in 2021. However, a very narrow majority in the Senate should limit the size of any fiscal packages and reduce the likelihood of tax increases. While we expect political risks to diminish somewhat in 2021, unexpected developments could lead to volatility and downside risk.
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