economic perspective

January 2021


By Stephen Rich

2020 was a remarkable year in so many ways and will not soon be forgotten. Financial markets came to a screeching halt in March due to pandemic-driven lockdowns of economies around the globe. Driven by the fallout of the pandemic, the equity markets experienced the fastest dive into a bear market in history, as the S&P 500® Index declined 34% in just 33 days. The U.S. economy plunged into an immediate recession, with Gross Domestic Product (GDP) declining by 31.4% in the second quarter alone. The U.S. Federal Reserve (Fed) dropped the Fed Funds target rate from 1.50–1.25% to 0–0.25% and aggressively reinstituted its quantitative easing program to support liquidity in the financial markets. The federal government responded quickly and decisively by ramping up fiscal spending to support small businesses and the more than 20 million people who lost their jobs as the recession began. Almost as quickly as things deteriorated, the U.S. stock markets began recovering toward the end of the second quarter, including recording their best April since 1987; and by the third quarter, the GDP rebounded and grew at an annual rate of 33.4%. In the final months of the year, the markets continued to respond positively to advances in COVID-19 therapeutics and vaccines, as well as to the pending outcome of a contentious U.S. presidential election, won by Joseph R. Biden Jr., who was sworn in as the 46th president on January 20. Remarkably, when all was said and done, the U.S. stock market, as measured by the S&P 500 Index, finished 2020 at 3,756—up 18.4% and at an all-time high, having set 33 record highs during the year. Looking ahead into 2021, some key data points that Mutual of America Capital Management LLC is keeping a close watch on include: 1) the reopening of the economy, 2) unemployment trends, 3) equity valuations and 4) stimulus and spending by the Biden administration.

Market Update

Overall, the U.S. equity markets posted a strong fourth quarter, which created positive returns for all major indexes for 2020. Large-cap equities finished the year with the S&P 500 up a robust 18.4%. The Nasdaq and Russell 1000® Growth Indexes were solidly in positive territory, up 45.1% and 38.5%, respectively. The Russell 2000® Index returned 31.4% in the fourth quarter and finished the year up 19.9%. Even the Russell 1000® Value Index was up 2.8% after struggling earlier in the year. However, the gap between growth and value stocks is staggering, as reflected in the 35.7% gap (after reaching a record high of 39.9% in August) between the performance of the Russell 1000 Growth Index (up 38.5%) and the Russell 1000 Value Index (up 2.8%).

Some of last year’s standout performers are familiar names. A boom in e-commerce spending sent Amazon surging 76% for 2020, while Apple became the first-ever $2 trillion company amid strong demand for its iPhone 12 model and optimism about its self-driving car efforts. With consumers at home spending more time streaming television shows and movies, Netflix posted a 67% gain for the year. Growth in the electric vehicles market sent shares of Tesla Inc. up 743% for the year, propelling the company’s market value to $669 billion. Tesla—the top performer in the S&P 500 during 2020, with its gains more than double those of the second-best-performing stock, Etsy—is worth more than five times General Motors, Ford Motor Co. and Fiat Chrysler Automobiles combined. The surge in online shopping and the rush to deploy vaccines across the country helped to fuel delivery service companies like FedEx and UPS, which returned 72% and 44%, respectively, for the year.

However, not every company benefited from the market rally. Within the S&P 500, 39% of the companies ended 2020 with either flat or negative returns. Cruise line companies, Carnival Corp. and Norwegian Cruise Line Holdings, were the biggest losers, both shedding 57% of their market value. The pandemic also weighed heavily on the energy sector with the S&P 500® Energy Index sinking 37%, posting its worst year in at least three decades.

The fixed income market was also strong in 2020, with interest rates at historic lows after falling more than one percentage point since the beginning of the year. Demand for bonds was strong, especially after the Fed announced its willingness to purchase bonds of U.S. corporations on March 23. Since then, investment-grade bonds rallied 22.0%, as measured by the Bloomberg Barclays U.S. Corporate Bond Index. For the year, that Index posted an aggregate total return of 9.9%. Even more impressive in 2020, the 10-year Treasury bond and 30-year Treasury bond returned 10.6% and 18.6%, respectively.

In 2020, companies took advantage of the low-interest-rate environment and high demand for fixed income products by investors seeking yield to help generate income, and issued a record amount of new bonds. Issuance of investment-grade corporate debt surpassed $1.8 trillion during 2020, which was the fastest pace on record. As context, over the full year of 2019, a total of $1.1 trillion in new debt was issued.

Labor Markets’ Improvement Slowing

It appears that month-over-month gains in the labor markets are beginning to slow. The 6.7% unemployment rate for December was unchanged from the November rate. That said, the labor markets have improved dramatically since the lows in April 2020 when the unemployment rate stood at 14.7%. Weekly unemployment claims continue to be elevated, and since August, have averaged more than 800,000 per week. Continuing claims stand at 5.2 million people through January 2, 2021. However, if people receiving pandemic unemployment assistance and pandemic emergency unemployment compensation are included, the total number of claims for some form of relief fell from a peak of 33.6 million to 19.6 million. That represents a significant decline but is still a huge number, indicating that more needs to be done to get back to pre-pandemic employment levels.1

Equity Valuations

Even seasoned investors in the market have been surprised by the resilience exhibited by the equity markets. This is particularly true in light of a lopsided economy still healing from the lockdown-induced recession. The low-interest-rate environment in the U.S. and globally is the most widely accepted explanation for lofty equity valuations. The yield on the 10-year bond in the U.S. remains below 1.0% and, worldwide, over $18 trillion of government debt has negative interest rates. Mathematically speaking, lower interest rates increase the value of equities because lower discount rates are used to calculate the future value of cashflows. However, a simpler explanation is that a low-interest-rate environment forces investors out of low- or negative-returning bonds and into higher-returning stocks. The phrase “There Is No Alternative” (TINA) has been used to characterize this behavior.

As a result of the market’s rise, valuations appear to be stretched. Additionally, other signs such as the hot IPO market, the unprecedented fundraising in Special Purpose Acquisition Companies (SPACs), the emergence of first-time investors on platforms such as Robinhood and the massive rally in the cryptocurrency Bitcoin all point toward increased speculation in the market.

The top beneficiaries of both the work-from-home situation and the low-interest-rate environment have been the largest of the large-cap growth companies. The top five companies in the S&P 500—Apple Inc., Microsoft Corp., Inc., Facebook Inc. and Alphabet Inc.—represent 20% of the Index’s market capitalization and 52% of its gains over the last 12 months. These five companies, which sell for an average of 34 times their forward earnings, are more expensive than most other U.S. indexes. For example, the Russell 1000 Growth Index is valued at 31 times its forward earnings, the entire S&P 500 Index is at 22 times, the Russell 1000 Value Index is at 19 times, the Russell 2000 Index is at 18 times and the Russell 2000 Value Index is at just 15 times its forward earnings. It would not be surprising for investors favoring the top growth companies to shift their focus to value and small-cap companies as the economy continues to heal.


The housing market finished the year strong, aided by record-low mortgage rates that are attracting potential homebuyers. Existing home sales advanced 25.8% year-over-year through November, and the median price of existing homes increased by 14.6% and now sits at $318,000. Single-family housing starts rose in December for the fourth straight month, to 1.67 million, which is the highest number since 2006.2 The full year saw a total of 1.38 million starts, with single-family construction climbing to 991,200, both at their highest level since the mid-2000s. Additionally, applications for building permits—a proxy for future construction—increased 4.5% in December to a 1.71 million annualized rate, also the best mark since 2006.


The U.S. economy continues to recover from the massive dislocation brought on by the COVID-19 pandemic. Assuming there is a significant degree of fiscal policy support, the consensus expectation of economists for the U.S. economy is for it to grow approximately 4.0% in 2021. The unemployment rate should continue moving down from its current 6.7% level to approximately 5.5% by year-end. Recent strength in the 10-year Treasury yield and an accelerating economy could allow the yield to push higher within a range of roughly 1.25% to 1.50%. Housing finished the year strong and should provide positive multiplier effects to the overall economy. Politically, with the Democrats in control of the White House and holding slim majorities in both chambers of Congress, we expect a continued high level of federal spending and fiscal transfers to households. The Biden administration is asking for a $1.9 trillion stimulus package, billed as the American Rescue Plan. The centerpiece of the plan provides direct payment of $1,400, on top of the $600 approved in December, to eligible recipients as a way to help households recover from the impact of the pandemic. Meanwhile, the Federal Reserve appears to be staying on the sidelines with an interest rate increase until inflation and employment goals are satisfied. We are optimistic that the economy will continue to show improvement in the coming year. As the economy heals in 2021, we would expect to become more optimistic about U.S. stocks, especially value-oriented stocks, which lagged in the equity market’s recovery last year.

Stephen Rich is the President and CEO of Mutual of America Capital Management LLC.


Bureau of Labor Statistics.


U.S. Census Bureau.

Past performance is no guarantee of future results. The index returns discussed above are for illustrative purposes only and do not represent the performance of any investment or group of investments. Indexes are unmanaged and not subject to fees or expenses. The index returns above reflect the reinvestment of distributions. It is not possible to invest directly in an index.

The views expressed in this article are subject to change at any time based on market and other conditions and should not be construed as a recommendation. This article contains forward-looking statements, which speak only as of the date they were made and involve risks and uncertainties that could cause actual results to differ materially from those expressed herein. Readers are cautioned not to rely on our forward-looking statements.

Mutual of America Capital Management LLC is an indirect, wholly owned subsidiary of Mutual of America Life Insurance Company. Securities offered by Mutual of America Securities LLC, Member FINRA/SIPC. Insurance products are issued by Mutual of America Life Insurance Company.

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