Q4 2020 Review Banner

2020 Q4 Market Review

Q4 2020 Review Banner

Stock markets around the world continued to rally in 2020's fourth quarter. As epidemiologists raced to bring out vaccines to fight the coronavirus, patient investors who stuck with their strategic IFA investment plans were rewarded.

It was an unprecedented year. A strong opening that included unemployment hitting a 50-year low was followed by a swift double-digit drop in stocks in February amid a surge in coronavirus cases. (See chart below.) In 2020's first quarter, the IFA U.S. Large Company Index wound up losing nearly 20% and the IFA U.S. Small Company Index fell by more than 32%.

Both IFA benchmarks started to recover in late March as companies adapted and millions of Americans learned how to remain productive in the face of what medical authorities characterized as the worst pandemic since 1918. As summer came to an end, the blue-chip S&P 500 was breaching pre-pandemic levels.  

As it turned out, even as the coronavirus spread, a rising tide of medical and technological innovations -- including the unprecedented and rapid development of a vaccine -- whipsawed investors who focused on a barrage of gloom and doom headlines about the market's fall. The comeback in global stocks gained steam in subsequent quarters and continued to produce healthy gains across key asset classes as tracked by IFA's global indexes. Not even a contentious presidential election wound up derailing a fourth quarter domestic equity rally.

The Q4 rebound was characterized by strong outperformance of the size and value premiums relative to growth-styled stocks. (See table below.) As represented by widely tracked domestic Russell indexes, small cap investors were especially rewarded in this period. In particular, those who didn't bail on small-cap value stocks came out ahead. Also, notice how large value equities outperformed as compared to large growth. 

Evidence-based research by Nobel Laureates such as Eugene Fama and Harry Markowitz have shown how harmful it can be to manage bouts of volatility by trying to time markets. IFA President Mark Hebner refers to such traders as "Time Pickers." (See Step 4 of his book, "Index Funds: The 12-Step Program for Active Investors.") A study of our own clients' behavior during the 2008-2009 downturn explains why staying the course is not only wise, but critical. 

Knowledge and information can contribute to reducing fear, helping you to make more rational and disciplined choices. Along these lines, IFA's wealth advisors recommend that investors check to make sure they've got the right portfolio mix between stocks and bonds. To help with such an analysis, we've developed a Risk Capacity Survey. This online tool is designed for both novices and those with more experience in financial markets. After all, life changes and so do individual circumstances. 

Domestic Equities

Domestic stocks continued to climb in the fourth quarter as all six of IFA's key domestic equity indexes landed on positive ground. With the exception of large-cap growth, returns were even stronger than the previous quarter. U.S. small-cap value led the way, producing a double-digit percentage gain (32.77%). On the low side, the IFA benchmark covering domestic large-cap growth stocks generated a return of 11.45% in the quarter.

International (Developed) Equities

IFA index returns from developed markets that are outside the United States all remained positive in Q4, producing higher returns than the previous quarter's upbeat performances. Results ranged in the latest completed quarter from a gain of 22.20% for international large-cap value equities to a return of 17.97% for international small-cap stocks. 

Real Estate Equities

Global real estate was another upbeat performer in Q4. In 2020's final quarter, IFA's Global REIT Index returned 10.76%. That represented a big jump from the year's Q3 in which the diversified real estate benchmark finished with a 1.95% gain. 

Emerging Markets Equities

Just like developed foreign markets, stocks in emerging markets stayed positive in the fourth quarter. For Q4, emerging markets returns ranged from almost 21% for IFA's index focused on large-cap value stocks to a gain of 19.43% for IFA's benchmark of emerging markets small-cap stocks.  

Fixed-Income

In the fourth quarter, the 30-year U.S. Treasury rate increased by 0.19 of a percentage point to 1.65% while the five-year U.S. Treasury rate increased by 0.08 of a percentage point to 0.36%. 

For Q4, all of the fixed-income benchmarks reviewed by IFA managed to avoid falling into negative territory. Total returns ranged from 0.21% for the IFA Five-Year Global Index to flat (0.00%) for the IFA Short Term Government Index. If interest rates have fallen, the price of existing bonds can be expected to increase – so that new buyers receive the same current yield as that available from newly issued bonds at the lower rate with similar maturities and risk levels.

IFA Index Portfolios

All of the returns of the IFA Index Portfolios shown below are net of the maximum annual 0.90% advisory fee through Dec. 31, 2020. With upbeat performances across key IFA equity and fixed-income categories following an economic slowdown earlier in the year, portfolios across-the-board finished 2020 with positive results.

Each quarter, we monitor our recommended funds for clients. As part of that process, we've developed a rating system. For a summary of those results, please feel free to check IFA's Performance Monitoring Report (PMR). 

We've also created an Investing Kit that includes a copy of "Index Funds: The 12-Step Recovery Program for Active Investors" book and a documentary film based on the book. It also comes with a Galton Board (Stock Market Edition), which simulates the random distribution of 600 monthly returns of the IFA Index Portfolio 100. You can find the Investing Kit on Amazon.


A graphic in this article ("As Much of 2020 That Fits on One Page") was republished here with permission of Avantis Investors. No further republication or redistribution is permitted without the consent of Avantis Investors. 

Performance results for actual clients that invested in accordance with the IFA Index Portfolio Models will vary from the backtested performance due to the use of funds for implementation that differ from those in the index data, market conditions, investments cash flows, mutual fund allocations, changing index allocations over time, frequency and precision of rebalancing, not following IFA's advice, retention of previously held securities, tax loss harvesting and glide path strategies, cash balances, lower advisory fees, varying custodian fees, and/or the timing of fee deductions.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you. For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/