The Year in Business and Economics Through Charts

It was a remarkable year for the economy. As the pandemic surged in early spring, financial markets and the global economy nearly collapsed. Then central banks responded forcefully and risk assets rallied furiously, even as the real economy continued to struggled. The yawning gap between the haves and haves-not has only grown wider as businesses adopted to the pandemic. 

Driving many of the changes was the Tech sector, which had been disrupting and transforming business for years. The Covid-19 pandemic sharply accelerated trends already underway. These charts taken from the amazing Visual Capitalist chronical a turbulent year (click to enlarge):

March 2020: Historic unemployment as the US economy goes into lockdown

May 2020: Aided by technology world starts to work from home. A small company called Zoom becomes a verb (and bigger than the global airlines industry)

June 2020: Tesla-mania!! The electric carmaker surges to become the most valuable automobile company in the world and just keeps going...increasing ~700% y-o-y by year-end

 July 2020: Big Tech dominates business and drives a wild bull market

August 2020: Back-stopped by central banks in Spring, investors piled into risky assets leading to the shortest bear market in history

November 2020: The CARES Act, supportive monetary and fiscal policies helped stabilize the real economy. But the recovery was uneven and most Americans continued to struggle

Jan-Dec 2020: The nation's gaping wealth inequality was even more stark at the top. In 2020, the richest Americans increased their wealth by $1T   

Robots Just Wanna Have Fun

Boston Dynamics tries to give 2020 a cheery send off with an amazing dancing robots video: 

As the NY Post notes, robots are now doing the 'Human'. Elon Musk saw the future of humanity and warned "This is not CGI" (or maybe he just remembers his own dancing video). 

The Class of 2020

The NYT's Michelle Cottle looks back at the political newsmakers of 2020. (But where's Trump? Forgotten already? Nah, he looms large over nearly every member of the class)

2020: Amid the Gloom a Record Year for iBanking

Every crisis is an opportunity for someone. The pandemic has been catastrophic for many small businesses, but many large businesses, particularly in Tech, have thrived. Who else did well? Their bankers. 

Things looked bleak when credit markets froze in Feb. But after central banks came to the rescue, corporations raced to raise cash and lock in cheap long-term funding. According to the FT, companies raised a record $5T of debt in 2020. It was a robust year for equity offerings as well, with more than $300B raised through IPOs and secondaries. And all that debt and equity underwriting generated record fees for global banks--$125B worth!

The five largest US banks account for ~30% or $37B of the year's total investment banking fees. That haul should mean a very merry bonus season, at least at GS and MS. The other three firms all have big commercial banking arms and will need to set aside extra reserves for potential loan losses that have put pressure on their stock prices: the KWB Bank Index is down 14% YTD. All that reserving could shrink some of the rainmakers' pay at JPM, BoA and Citi...but probably not by much (if one bank pays well, everyone else dutifully follows). So expect Manhattan real estate to pick up again in February!

This is Us: The Economy Under Democrats and Republicans

President Trump was very proud of the economy and especially the stock market, pre-Covid. While it's debatable how much influence Presidents actually have on the economy or financial markets, they are more than happy to take credit when things go well and ascribe blame to others when they don't. 

It is however interesting to see what how the data falls. Using data from the BEA and thebalance.com, we can get a sense of different Presidents' stewardship of the economy over the last 40 years (with the acknowledgement numbers alone never tell the whole story). Republicans fancy themselves as better financial managers. Yet the US economy has clearly fared better under Democract presidents, growing at 2.8% per year vs 2.3% under their counterparts (click to enlarge):

From Reagan to Trump, the US economy has grown around 2.5% per year, on average. Breaking the data out by the Presidents themselves, the economy grew fastest under Clinton (3.9%) and Reagan (3.5%) and below trend over the others' terms. (The data for the Trump years include CBO's GDP projections for 2020)

Yes, Trump faced a once-in-a-century calamity. But even without 2020, the economy grew only at around 2.5% under his administration. Basically on trend.

Obama also faced a grave economic crisis in his first term. Excluding 2009, the economy grew about by 2.2% per annum on his watch. Not as good as Trump, pre-Covid (...though Obama and Biden will make the argument they laid the foundation for Trump's economy).

But what about the stock market? Which increasingly has little relation to the real economy but nonetheless is still held as a barometer of economic health and consumer sentiment ("...it's forward looking"). Don't investors favor business-friendly Republican administrations? 

Not necessarily. The chart below shows the cumulative price returns of the S&P 500 under different presidents. Clinton (1993-2000) had the best stock market. He certainly rode the Internet Bubble and left just in time. "W" had the worst. He inherited the Tech meltdown on the way in (a consolation of sorts for internet "founder" Gore) and oversaw the subprime meltdown on the way out. The stock market actually performed much better under Obama than under Trump (through 12/24/2020) and even Reagan!

Can Biden nuture the economy back to health? We'll see...but if you're looking to the stock market for any indication (you shouldn't, but if you are)...then the verdict is in. The S&P 500 is having the best post-election performance in at least 40 years (more due to Pfizer, Moderna and the promise of easy money than anything else, but I'm sure the Biden folks won't mind taking some credit).

Masks Still More Effective Than a Covid Vaccine

The latest forecasts from the widely cited IHME model suggest a hard few months ahead for the US, even with a rapid vaccine rollout. In fact, the best scenario still banks on universal mask usage. 

The chart below shows projected deaths by April 1, 2021 under the four scenarios modeled by IHME (click to enlarge): 

The model doesn't show how effective a combination of these scenarios could be, e.g., rapid vaccine roll-out and universal mask usage. However, widespread vaccination in the near-term may be overly optimistic. Even if the vaccine is as effective as early results suggests, it's of no use if people don't take them. A recent Pew Research survey reveals 4 in 10 Americans don't expect to get the vaccine once available.

The good news is most Americans are using masks. The bad news is they are not all doing so when needed the most. Covid appears to spread most easily not at work or school, but in small social gathersing indoors. And that's when Americans are least likely to wear masks, according to a new poll:

Capital Records: Companies Raise $3.6T from Public Investors in 2020

An unprecedented year keeps surprising. Who would have thought that in the mist of the biggest shock to the global economy in a century, corporations would raise a record amount capital from investors? Data below shows companies were able to raise to a stupendous $3.6T from record issuances of IG ($2.4T), BIG ($426B) debt and secondary stock sales ($538B) on the back of extremely accomodative central bank actions. (IPOs hauled in another $236B)

What does it mean? Success of monetary policies to stave of economic disaster? Or more moral hazard that will cause a bigger crisis down the line? Or both? 

November Factor Upheaval: Top Quant Funds Caught in Epic Rotation

Some of the industry's biggest quant names, including AQR, Renaissance and Two Sigma dropped sharply in November after the positive news from Pfizer's vaccine trial spurred a violent rotation out of high-flying tech stocks (Growth, Momentum factors) into cyclical, beaten-down Value stocks. The below chart from GS shows the reaction of various sectors (H/T HumbleStudentoftheMarkets):

Two Sigma's Venn platform provides further details on the the performance of different factors in November (click to enlarge):

Momentum had one of its worst month in history. Other factors with notable pullbacks were Low Risk and Quality. Low-leveraged and highly profitable companies underperformed more indebted and less profitable companies. Not surprsing as Low Risk and Momentum have been quite correlated in recent months (think FAAMG stocks).

Here's another look at Value and Momentum performances relative to history from JPM:

Additionally, much of the damage was done Nov 6-Nov 10. The Value-Momentum spread was relatively stable the rest of the month:

Hidden Figures: Unexpected Manager Exposures

Two Sigma's Venn platform has a very interesting analysis on the hidden exposures of fund managers. They analyzed the factor exposures of funds in four Morningstar catetgories: Large Growth, Large Value, Small Growth and Small Value. 

First up Large Growth Funds, which according to Morningstar: Invest primarily in large US companies that are expected to grow faster than other large-cap companies. Growth describes companies with high earnings and sales growth rates and high valuations. These funds are expected to exhibit negative exposure to Value factors (like low price-to-book) and zero to negative exposure to the Small Cap factor (market capitalization).

The analysis found that average exposure to Venn's Value factor was indeed negative among funds, though some funds in the category did exhibit some positive exposure to the factor. But surprisingly, the average Large fund displayed a fairly positive exposure to Venn's Small Cap factor! (Click on chart to enlarge)

Next to be analyzed were Large Value Funds.  The average positive exposure to Venn's Value facor was as expected. However, once again, the Size exposure was surprising. The majority of Large Growth funds exhibited positive Small Cap exposure.

Moving to Small Cap Growth Funds,  the analysis found that, on average, funds exhibited a negative exposure to Venn's Value factor--as expected (though a surprising number of funds did display positive exposures). There was little suprise in the Size exposure, with the vast majority of funds exhibiting positive exposure to the Small Cap factor.

The last category was Small Cap Value Funds. The results of here were in line with expectations for both Value and Size factors. The average exposures to both factors were positive and no funds exhibited negative exposures to either factor. Well done Small Cap Value managers, you do as you say!

Note: The time period of the analyes was Oct 29, 2016 - Oct 28, 2019