The year 2020 presented us with unique challenges. Never has a singular event had such wide-ranging repercussions as the Covid pandemic. It has touched nearly every area of our lives. Schooling, socializing, family gatherings, travel, and more. Some of the restraints from social distancing and restrictions implemented to slow the spread of Covid even now remain in place.
Of course, it wasn’t just our daily routines that were impacted. The economy and our investments saw unprecedented swings in 2020.
Yet, we are an optimistic nation. As the economy was set to climb out of a deep hole, investment legend Warren Buffett said in a May article in Barron’s newspaper, “I remain convinced…nothing can basically stop America. The American miracle, the American magic has always prevailed, and it will do so again.” Warren Buffett has arguably been the most successful long term investor in the history of our country and his steadfast belief on the long term prosperity of the Unites States has served many an investor well.
A rollercoaster year ends on a high note
In terms of the equity and fixed income markets, as in so many ways, 2020 was a year none of us will ever forget. The initial outbreak of Covid-19 and fears about its rapid spread sent stocks and Treasury bond yields plummeting in March.
The broad-based S&P 500 Index lost nearly 34% within a month’s time (Yahoo Finance S&P 500 data). The downdraft was fueled by the massive amount of uncertainty that surrounded the lockdowns and unprecedented interruption of economic activity at home and abroad.
The swiftness of the decline was unexpected and unprecedented. But the recovery, which was borne out of extreme pessimism, caught many analysts by surprise.
An honest assessment of the long term would convince investors one must be right twice to successfully time the market. You must correctly call the peak and the trough, or something close to the top and bottom.
No one can do that consistently.
As the major indexes rallied from the March 23 low, many analysts continued to warn of further declines, which never materialized. These analysts are smart and experienced investors. They know their craft. But to frame it in the simplest terms, even very smart people can’t predict the future with certainty. No one can. As baseball manager Yogi Berra once said, “It’s tough to make predictions, especially about the future.”
The bear market in 2020, which was the first since the 2008 financial crisis, lasted barely over one month, although in retrospect if felt like much longer. While the decline in the broad-based index of 500 larger U.S companies was unusually swift, the peak-to-trough sell-off of about 34% was in line with past bear markets.
What stemmed the sell-off?
The Federal Reserve announced massive new programs designed to cushion what was to be a significant blow to economic activity. Meanwhile, Congressional leaders put aside their differences and passed the $2 trillion CARES Act, which was far greater than the stimulus passed in 2009.
Q2’s record decline in GDP was followed by a record rebound in Q3. Coupled with record low interest rates, stocks posted some of the best gains we’ve ever experienced.
Yet, the economy is still not back to pre-Covid levels. Sure, some sectors have performed admirably, but GDP and employment remain below prior peaks. The unemployment rate is well above its early 2020 low, and layoffs continue at elevated levels.
Moreover, industries that depend on person-to-person interactions such as travel, airlines, restaurants, movies and more continue to face obstacles.
The new vaccines promise to alleviate these health and economic concerns. Hopefully we’re just seeing hiccups as states grapple with a massive undertaking, but the year-end rally was due, in large part, to optimism that the vaccines will be widely available by mid-2021. Our team’s investment case is that this is exactly what will happen. The vaccine’s success likely leads to growth in GDP and corporate earnings in 2021. Combined with historically low interest rates, an accommodative Federal Reserve and the Biden Administration’s likely stimulus relief, lends a tailwind to the equity markets in the year ahead.
Volatility is a certainty
As I’ve emphasized in prior conversations, stocks had a long-term upward trend, and that upward trend
is incorporated into your financial plan. But stocks don’t rise in a straight line.
From 1980 to 2020 (41 years), there have been:
- 7 down years, with the average decline during a down year of -13.1%
- 34 up years, with the average increase during an up year of +18.4%
Sources: S&P DJ Indexes, LPL Research, St. Louis Federal Reserve
The only time we’ve had back-to-back declines during the 41-year period was during 2000-2002 (stock/tech bubble bursting). As many times as we have heard these type numbers in the past, it is always productive to be reminded again, equity investors must endure short term uncertainly but the overwhelming weight of history favors the long term investor.
Let me once again emphasize that it is our job to assist you with any issues/questions that arise. If you have any questions, please feel free to give me or any of my team members a call.
As always, our team is honored and humbled that you have given us the opportunity to serve as your financial advisor, and we want to wish you a happy and prosperous New Year!
January 2021
