2020 Year in Review

Jan 11

On March 23 of 2020 I wrote the following:

Let's pretend for a minute that it's the year 2025...

You’re looking back at the CoronaCrash of 2020, the massive losses it dealt to your portfolio and how you reacted as an investor.

Just as we reflect on prior crashes, our accounting of what happened will contain phrases like “Of course ______ happened…” or “Clearly it was going to be a big deal...” or “Everybody knew that…”

In your brain, the crash of 2020 won’t be an accurate recollection of what it seemed at the time, because right now it seems irreducibly scary and uncertain. Time will pass, certainty will be given, and our fears will subside. That's how it works.

In 2025 I'll be advising clients, some of them old and some of them new and during discussions we will reflect back on what decisions were made right now.

Did we completely sell at a 30% loss?

Did we buy?

How close were we to the bottom when we bought?

When we sold with the intent to get back in, how much of the rebound did we miss?

... When meeting new potential clients I often ask about their experience through the Financial Crisis and, more recently, the 20% decline in late 2018. What did they do? How did they feel? Etc. But from here on out, this current crisis will be the defining moment for all of us.

Everyone agrees that 2009 or 2010 would have been the best time to buy stocks in a generation, but very few investors actually did.

Why is that?

...Take your pulse right now after watching the news for a few minutes.... THAT'S WHY.

It's scary.

Now I'm not saying that this is the bottom of this market or that you should rush out and buy stocks right now --after all, this crash has been the most unpredictable, rapid and unprecedented decline by almost every modern metric. But we should acknowledge the above and try to determine where we fit into history.

Over the course of the last month I've presented a lot of data and charts and encouragement that this will get better eventually. In fact, my own confirmation bias has me seeking out third-party research and opinions to support this belief. I see the negative stuff too, but I refuse to give in to fear.

To be clear, my opinions and theses are optimistic in nature.

I believe things will be okay.
I believe the ensuing rebound will be prolific.
I believe good things can come from crises.

I have to keep this disposition because (1) it would have been the right attitude to have in every prior decline and (2) there is very little good news these days and I'm doing my part fo balance things out.

My conversations over the last couple weeks have ranged from clients saying,

"How can I save and invest more while prices are low."

"Halt all future investments and turn my portfolio into cash."

These responses --and any in-between-- are all perfectly normal and human and justified.

If you're panicking, that's okay.

If you're scared, that's okay.

If you're mad, that's okay (even if you're mad at me... more on that below).

If you're optimistic, that's okay too.

I'm not here to tell you how to feel, but to try and be a sort of "release valve" during a crisis situation. If it were solely up to me we'd stay the course, use excess cash to buy into the hardest hit part of our portfolios, and continue making moves to optimize your tax situation (tax loss harvesting, roth conversions).

(End of excerpt)

In hindsight, March 23 ended up being the low point of the year for the stock markets.

I often look back at my writings and cringe a little --which is okay, I'm a work in progress. But this particular excerpt is one I stand by. It's also one that happened at the exact bottom of the market and the apex of chaos. So now you can ask yourself; what did we do?

Auditing the decisions you and your advisor made is critically important to helping make good decisions in the future.

And now, a little recap of 2020....

The year 2020 was one of the most tumultuous in modern history, marked by a number of developments that were unprecedented. But the year also demonstrated the resilience of people, institutions, and financial markets.

The novel coronavirus was already in the news early in the year, and concerns grew as more countries began reporting their first cases of COVID-19. Infections multiplied around the world through February, and by early March, when the outbreak was labeled a pandemic, it was clear that the crisis would affect nearly every area of our lives. The spring would see a spike in cases and a global economic contraction as people stayed closer to home, and another surge of infections would come during the summer. Governments and central banks worked to cushion the blow, providing financial support for individuals and businesses and adjusting lending rates.

On top of the health crisis, there was widespread civil unrest over the summer in the US tied to policing and racial justice. In August, Americans increasingly focused on the US presidential race in this unusual year. Politicians, supporters, and voting officials wrestled with the challenges of a campaign that at times was conducted virtually and with an election in the fall that would include a heightened level of mail-in and early voting. In the end, the results of the election would be disputed well into December. As autumn turned to winter, 2020 would end with both troubling and hopeful news: yet another spike in COVID-19 cases, along with the first deliveries of vaccines in the US and elsewhere.

For investors, the year was characterized by sharp swings for stocks. March saw a 33.79% drop in the S&P 500 Index1 as the pandemic worsened. This was followed by a rally in April, and stocks reached their previous highs by August. Ultimately, despite a sequence of epic events and continued concerns over the pandemic, global stock market returns in 2020 were above their historical norm. The US market finished the year in record territory and with an 18.40% annual return for the S&P 500 Index. Non-US developed markets, as measured by the MSCI World ex USA Index,2 returned 7.59%. Emerging markets, as measured by the MSCI Emerging Markets Index, returned 18.31% for the year.

Fixed income (bond) markets mirrored the extremity of equity behavior, with nearly unprecedented dispersion in returns during the first half of 2020. For example, in the first quarter, US corporate bonds underperformed US Treasuries by more than 11%, the most negative quarterly return difference in data going back a half century. But they soon swapped places: the second quarter was the second-most positive one on record for corporates over Treasuries, with a 7.74% advantage.3 Large return deviations were also observed between US and non-US fixed income as well as between inflation-protected and nominal bonds.

Global yield curves finished the year generally lower than at the start. US Treasury yields, for example, fell across the board, with drops of more than 1% on the short and intermediate portions of the curve.4 The US Treasury curve ended relatively flat in the short-term segment but upwardly sloped from the intermediate- to long-term segment. For 2020, the Bloomberg Barclays Global Aggregate Bond Index5 returned 5.58%.

The chart below shows US Credit minus US Treasury: Quarterly Returns, March 1973–December 2020

Uncertainty remains about the pandemic and the broad impact of the new vaccines, continued lockdowns, and social distancing. But the events of 2020 provided investors with many lessons, affirming that following a disciplined and broadly diversified investment approach is a reliable way to pursue long-term investment goals.

Market Prices Quickly Reflect New Information about the Future

The fluctuating markets in the spring and summer were also a lesson in how markets incorporate new information and changes in expectations. From its peak on February 19, 2020, the S&P 500 Index fell 33.79% in less than five weeks as the news headlines suggested more extreme outcomes from the pandemic. But the recovery would be swift as well. Market participants were watching for news that would provide insights into the pandemic and the economy, such as daily infection and mortality rates, effective therapeutic treatments, and the potential for vaccine development. As more information became available, the S&P 500 Index jumped 17.57% from its March 23 low in just three trading sessions, one of the fastest snapbacks on record. This period highlighted the vital role of data in setting market expectations and underscored how quickly prices adjust to new information.

Some claimed the recovery was just as unprecedented as the fall.

My response: Everything is unprecedented. You must plan on the plan not going according to plan.

One major theme of the year was the perceived disconnect between markets and the economy. How could the equity markets recover and reach new highs when the economic news remained so bleak? The market’s behavior suggests investors were looking past the short-term impact of the pandemic to assess the expected rebound of business activity and an eventual return to more-normal conditions. Seen through that lens, the rebound in share prices reflected a market that is always looking ahead, incorporating both current news and expectations of the future into stock prices.

Owning the Winners and Losers

The 2020 economy and market also underscored the importance of staying broadly diversified across companies and industries. The downturn in stocks impacted some segments of the market more than others in ways that were consistent with the impact of the COVID-19 pandemic on certain types of businesses or industries. For example, airline, hospitality, and retail industries tended to suffer disproportionately with people around the world staying at home, whereas companies in communications, online shopping, and technology emerged as relative winners during the crisis. However, predicting at the beginning of 2020 exactly how this might play out would likely have proved challenging.

In the end, the economic turmoil inflicted great hardship on some firms while creating economic and social conditions that provided growth opportunities for other companies. In any market, there will be winners and losers—and investors have historically been well served by owning a broad range of companies rather than trying to pick winners and losers.

Sticking with Your Plan

Many news reports rightly emphasized the unprecedented nature of the health crisis, the emergency financial actions, and other extraordinary events during 2020. The year saw many “firsts”—and subsequent years will doubtless usher in many more. Yet 2020’s outcomes remind us that a consistent investment approach is a reliable path regardless of the market events we encounter. Investors who made moves by reacting to the moment may have missed opportunities. In March, spooked investors fled the stock and bond markets, as money-market funds experienced net flows for the month totaling $684 billion. Then, over the six-month period from April 1 to September 30, global equities and fixed income returned 29.54% and 3.16%, respectively. A move to cash in March may have been a costly decision for anxious investors.

It was important for investors to avoid reacting to the dispersion in performance between asset classes, too, lest they miss out on turnarounds from early in the year to later. For example, small cap stocks on the whole fared better in the second half of the year than the first. The stark difference in performance between the first and second quarters across bond classes also drives home this point.

A Welcome Turn of the Calendar

Moving into 2021, many questions remain about the pandemic, new vaccines, business activity, changes in how people work and socialize, and the direction of global markets. Yet 2020’s economic and market tumult demonstrated that markets continue to function and that people can adapt to difficult circumstances. The year’s positive equity and fixed income returns remind that, with a solid investment approach and a commitment to staying the course, investors can focus on building long-term wealth, even in challenging times.

2020 was difficult for investors, but the lessons we learned about volatility, solvency, and grit are ones you can carry forward against the Next Thing...and the next...and the next.

Never let a good crisis go to waste. Learn what you did right and wrong and write it down. Time will have us forget what it's like to be in chaotic financial circumstances, but the more you can remember, the better equipped you'll be going forward.

Onward and Upward,

Adam Harding, CFP

FOOTNOTES

3US corporate bonds represented by the Bloomberg Barclays US Credit Bond Index. US Treasuries represented by the Bloomberg Barclays US Treasury Bond Index. Bloomberg Barclays data provided by Bloomberg. Indices are not available for direct investment.

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Adam Harding