As 2020 mercifully ended, Covid-19 was inflicting a new deadly surge worldwide, economies were suffering the effects of new imposed lockdowns and American political theatrics was in full bloom. Despite all of this and more, the US equity markets finished the year by posting impressive gains, with the S&P 500 rising 18.4% during the year and the technology heavy NASDAQ gaining an impressive 44.9%. Information Technology, Consumer Discretionary and Communication Services lead the way and represented the top three sectors in the S&P 500 in 2020. We believe the reasons for this impressive run remain in place for 2021, yet there are some potential risks to weigh going forward.
We think the single most important driver to a successful new year with positive economic growth and growing corporate earnings is the timing and speed in which governments can overcome and resolve the Covid-19 pandemic. The good news is that pharmaceutical companies have now developed several vaccines that have shown very effective results. As these vaccines are slowly rolled out the impacts of the disease should slowly wane, consumer confidence should rise, and the economic recovery will accelerate. As Americans and people elsewhere begin to feel safe and resume their normal spending habits, the global economies will expand. Currently most global economies are in an early-cycle recovery phase, and as the economies reopen post pandemic, a broadening expansion should continue to unfold and lead us to mid-cycle. While the vaccines bring hope for such a scenario, we must remain realistic on how effective and fast such relief will come. There are several headwinds that certainly could slow down defeating the virus. Studies show that only about one-third to one-half of Americans are open to taking the vaccine, and this proves true overseas as well. If there is a low vaccine acceptance rate, logistical problems with distributing the vaccine, or unexpected mutations of the virus, it could slow the pace at which most of the general population can achieve immunity. This could lead to a delay in the business recovery.
In addition to a positive resolution to the Covid-19 pandemic, other factors could also contribute to an optimistic outlook for investing. As the pandemic took a global hold of economies, the Fed joined other central banks in cutting rates to zero and initiating major asset purchase programs. These steps were taken to depress interest rates to help support the economic recovery. We expect this policy to remain in place for all of 2021 and perhaps beyond. We also think there is a greater likelihood of further US fiscal stimulus and government spending now that the election results have been finalized. Additional stimulus checks for individuals and new spending on government projects such as big infrastructure and climate-change reduction programs could help bridge the gap as the economy improves. Finally, there is a good argument to be made that increased savings rates and pent-up demand from consumers will prove to be an overlooked boost to consumer confidence which will spur further economic growth prospects.
While there is optimism in the new year, market volatility could be elevated, and certain risks might create headwinds throughout 2021. One such topic that has recently surfaced is the prospect for future inflation. It is not likely that inflation will increase in a harmful way this year but longer term out of control budget deficits and increased government debt could eventually lead to inflation. This is especially true if central banks are ineffective in responding with monetary policies. Therefore, monitoring any future inflationary changes will be very important to determining proper asset allocation. Another factor to consider going forward is the change in political oversite. With President Biden now in office and the democratic party in charge of the US Congress, new policies have the potential to change the business landscape. How the new administration engages in international relations, infrastructure spending, tax code, regulation, and climate change all could have a new impact on financial markets worldwide.
Overall, we are optimistic that there are investment opportunities in equities but do note that asset selection will be increasingly important this year with elevated stock valuations. While big name technology stocks, specifically FAANG stocks (Facebook, Apple, Amazon, Netflix, and Alphabet) lead the way last year, and still may be a dominant force this year, other companies and sectors might offer alternative hidden growth prospects. The pandemic has created an increased amount of disruption in many areas of commerce. Employees working from home could be here to stay which favors companies deploying cloud computing, remote networks, video communication and data security. Also, other online trends such as shopping, education, and medical consultation are ramping up to meet demand. In the last several years investors were rewarded with a concentration of large-cap US stocks. This asset class should continue to perform but other asset classes might offer greater prospects such has small-cap and international holdings. Finally, with uncertainty still on the horizon, it is always important to keep an investment portfolio that offers broad diversification and is designed to capture calculated opportunities.
We continue to pray that everyone stays healthy and safe, and that the vaccines will bring better times ahead for all.