by Richard Cull
Year End 2020 Market Recap & Commentary
“To be an investor, you must be a believer in a better tomorrow.”Benjamin Graham
Father of Securities Analysis
Going back through 2020 month by month in an attempt to chronicle events of the year, it quickly became apparent the sheer number of which would overwhelm the purpose of this communication.
More useful for our purposes, while running the risk of omitting something deemed noteworthy, we offer a summary that includes the worst pandemic in 50 years, hurricanes too numerous to assign names, wildfires raging on multiple continents and a significant GLOBAL economic pullback. Outshoots of those events included mandatory/ suggested lockdowns, soaring unemployment, civil and political unrest, overwhelming misinformation, and severe personal anxiety across populations.
We ARE NOT epidemiologists, psychologists or sociologists and normally would not include such things in our review, but we feel must be front-of-mind to truly understand the 2020 market backdrop.
We ARE investors and so we must study how the markets behaved against that backdrop.
Coming off a very strong 2019, the markets were poised for further gains on the back of a strong economy and continued earnings growth. Touching record highs early on, the benchmarks began rolling over on February 19th and went almost straight down for a month.
Recording the fastest correction on record, the S&P 500 index fell 10% in only SIX DAYS versus a post-World War II average of four weeks. The selloff was attributed to the heightened news around the coronavirus outbreak and its potential impact on the global supply chain. At that point fear set in and mass selling ensued. Another dubious record was set as the S&P 500 dropped 30% in only 22 days: faster than during the Great Depression, Black Tuesday and 2008 Financial Crisis. Almost all securities fell substantially with the exception of bonds.
On March 23rd, just over a month from onset of the panic, stocks bottomed and began an upward climb. While volatility remained elevated, most major indexes regained all of their loses (by August 18th) and finished the year at record levels.
During the unprecedented sell off and recovery, equities experienced a very pronounced bifurcation; those benefitting from the pandemic and those struggling from the pandemic. Companies such as Zoom, Peloton and Amazon held up better and rose further than companies such as Exxon Mobile, Wells Fargo and Carnival (cruise). The disparity was well born out in reconciling asset class returns between the Large Capitalization Technology stocks and every other asset class (small cap stocks, international stocks, value stocks, etc).
The final point to 2020 was the completion of the election and announcement of the vaccines on November 4th. With the removal of those uncertainties, the market instantly went into greed mode…referred to as “Fear of Missing Out” (FOMO) or “Risk On”. Investors both small and large not only came back into equites but often piled into high-flying stocks (Tesla, HelloFresh, Overstock.com, etc) hoping the euphoria would persist into the next year.
Dichotomy Between Wall Street & Main Street
The average investor is often understandably confused by the disconnect between the evening news and the market movements. 2020 provided a vivid lesson of this as the markets rose while the pandemic worsened. The textbook answer says markets anticipate and therefore move in advance of fundamentals. Stock prices are determined by the corporate profitability…in the long run. As you have gleaned from above comments, stock prices are driven by emotions (fear & greed) in the short run.
When the market observed the Federal Reserve lowering interest rates (fiscal stimulus), the government sending out checks (monetary stimulus) and companies adapting to the changing landscape (online everything), it looked past the present and anticipated a recovery.
All of this happened with unprecedented speed which can be partially explained by the fact it was an “Event Driven” bear market rather than a normal “Cyclical” or more dire “Structural” bear market. An event happened and investors realized no matter how scary, once that event is resolved the economy and corporate profits will return to normal.
The Year Ahead
So what will markets do in 2021? Given what transpired last year and the speed at which those events happened, it would be foolish to predict returns even if our crystal ball worked.
What we do know is the economy and corporate profitability is recovering. The Federal Reserve has communicated its willingness to maintain an “easy money” policy and Congress has just passed a second round of direct stimulus payments. Most importantly consumers are changing how they consume and companies are adapting their business models.
There will most definitely be challenges including the new administration, the effectiveness of the vaccines, the still struggling travel/ leisure industry, the growing discouragement among unemployed and a potential myriad of unforeseeable events (natural disasters, wars, terrorism, etc). Just as in life, such uncertainties are always present in investing.
Affect on our Approach
At Centric Wealth, we are LONG-TERM, FUNDAMENTAL investors.
During the bright days of a new year or the dark days of falling markets, DISCIPLINE and EXPERIENCE guide our investments decisions. Our investment process has been developed over many market cycles but will never be too rigid to be improved upon. 2020 was similar to bear markets we have experienced in some respects but very different in others. And now unbiased analysis of the events, the environment and the returns of 2020 adds to our experience and strengthens our resolve.
As for 2021 and the long-term, we agree with Benjamin Graham and are very much “a believer in a better tomorrow.”
We start with a Risk Number, a measurable way to pinpoint how much risk you want, need, and already have. Then, your wealth advisor will optimally allocate our investments to help you reach your financial goals. Along the way, you will receive transparency of information, seamless proactive service and the trust and accountability you need to stay on track. All of this will lead to your personal comprehensive investment strategy that is powerful, disciplined, responsive.
Centric’s Market Assumption Disclosures: This information is not intended as a recommendation to invest in any particular asset class or strategy or product or as a promise of future performance. Note that these asset class assumptions are passive, and do not consider the impact of active management. All estimates in this document are in US dollar terms unless noted otherwise. Given the complex risk-reward trade-offs involved, we advise clients to rely on their own judgment as well as quantitative optimization approaches in setting strategic allocations to all the asset classes and strategies. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. If the reader chooses to rely on the information, it is at its own risk. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, or tax advice. The outputs of the assumptions are provided for illustration purposes only and are subject to significant limitations. “Expected” return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making an investment decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact future returns. Asset allocation/diversification does not guarantee investment returns and does not eliminate the risk of loss.
Index Disclosures: Index returns are for illustrative purposes only and do not represent any actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Riskalyze Disclosure: The Risk Number® is a proprietary scaled index developed by Riskalyze to reflect risk for both advisors and their clients. The Risk Number is at the heart of a sophisticated set of tools to precisely measure the appetite and capacity for risk that each client has, and demonstrate their alignment with the portfolios built for them.
Shaped like a speed limit sign, the Risk Number gives advisors and investors a common language to use when setting expectations, recognizing risk and making portfolio selections. Just like driving faster increases hazards, a higher Risk Number equates with higher levels of risk.
General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks.