2020 Q4 Market Commentary: Hindsight is 2020
2020 will go down as one of the most challenging years in many of our lives. The COVID-19 pandemic took a toll on everyone. Hundreds of thousands lost their lives, leaving behind grieving family members who couldn’t say a proper goodbye. Countless others missed out on major life events, with weddings postponed and graduations held virtually. Our kids have missed out on a year of their short childhood, going to school online without any social interaction. We’ve all been in some stage of lockdown over the past year with many unable to see and touch their family and friends. As the year came to a close, it felt like we could all use a collective hug and some positive news.
Unfortunately, the hugs will have to wait a bit longer, and the positive news is being blurred by the negative. Multiple vaccines were successfully developed in a remarkably short time period, but the initial rollout of those vaccines has been slow. The events of January 6th at the Capitol reminded us all the massive political division in our country. A new, highly contagious strain of COVID-19 is rapidly spreading across the world, as cases, hospitalizations and deaths reach new records every day.
We all hoped 2021 would allow us to start fresh with a clean slate, but it’s not always that easy to get rid of the recent past. So while we can’t turn the page on 2020 completely just yet, we can look ahead to a brighter future. We can see the day, sometime later this year, when we can all start to return to some semblance of normalcy. We can start to make plans for social gatherings, travel, maybe even go to a concert again.
The markets have presumably been looking ahead to that brighter future, as they continue to hit new record high levels. This chart from Visual Capitalist helps you visualize the downturn we saw in each asset class in 2020, and the corresponding return from that low, with the total return for 2020 in the middle. It truly was a roller coaster year for most asset classes, as we saw stocks drop as much as 30-40% in March, only to rebound to finish the year with positive double-digit returns.
While we are used to seeing volatility in the stock market, the moves in 2020 were sharp and quick. The average time for stocks to recover from a bear market is a little over 2 years, but last year we went from a bull market to a bear market to another raging bull market in the span of 12 months! If you didn’t believe timing the markets was difficult before 2020, surely you understand how hard it can be now.
Bonds had a much less volatile year, save for a couple of days in mid-March before the Federal Reserve stepped in with support for the financial markets. Bond ETF’s briefly traded at significant discounts to their FMV, resulting in short-term losses like we see here in the iShares Core US Aggregate Bond ETF. This fund finished the year up 7% as interest rate declines pushed bond prices higher.
Real Estate also saw significant declines in March, dropping close to 40%, and while REITs rebounded from their lows, unlike stocks, they still finished the year down about 8%. Likewise, commodities suffered a significant drop and rebounded, but still finished the year in negative territory.
As we look ahead to 2021, we will again refrain from making any predictions about the future performance of the markets. We recommend instead reading this post from Bob Seawright outlining the many forecasting follies of market analysts and “experts”. As Bob says, there is only “One thing I can forecast with virtual certainty: There will be bad times and ugly losses ahead. I just don’t know when. And neither does anybody else.”
You might believe, as Jeremy Grantham does, that we are in the late stages of a bubble that is bound to burst sometime soon. Or maybe you are in Robert Shiller’s camp, believing that extremely low interest rates make today’s higher equity valuations more reasonable. You might see Tesla’s market capitalization exceeding the combined market capitalization of the world’s top seven automakers and think investors have gone insane. Or you might argue that Tesla is really a technology company not an automotive company and they have compelling growth prospects and a path to realizing that extreme valuation.
I wrote a post in February 2018 about Fear, FOMO, and Bitcoin that feels just as relevant today as it did when I wrote it. 2020 was a perfect encapsulation of all the emotions we feel when it comes to investing. We started the year feeling good after a strong market performance in 2019, but we worried that valuations might be stretched. We then saw a freefall in the markets in March and fear swept over us as the world shut down due to COVID. Then the markets recovered quickly, leading many to anticipate a “double-dip,” sitting on the sidelines waiting for the next crash. We flattened the initial curve of COVID infections only to see the spread accelerate again and again yet markets never reacted the way they did in March. Eventually, a feeling of FOMO (Fear of Missing Out) started to take over as we watched investors making money on everything from Kodak stock to the bankrupt Hertz rental car company on Robinhood. We ended the year back where we started - strong performance in many areas of the market lead us to worry that market valuations might once again be stretched.
Controlling all these emotions and sticking to a long-term plan is a lot easier on paper than it is in real life. Think back on the past year and all the emotions you felt as we navigated the news headlines. The world will never stop giving you reasons to deviate from your plan and to jump into the next hot stock or to sell everything and sit in cash. It can be even harder to do when you are stuck at home in the middle of a global pandemic. Yet time and again, we find that ‘staying the course’ is the right answer. There will be tweaks to make along the way, from periodic rebalancing to tax-loss harvesting.
However, the most important thing you can do with your portfolio is to avoid making the big mistake, as Carl Richards puts it in this illustration. Your emotions might get the better of you at the wrong time, and that’s what we are here to help prevent. Don’t let today’s headlines push you into doing something that negatively impacts your future plans.
There will be challenging times ahead, but as always we remain optimistic about the future. We wish each and every one of you a happy and prosperous 2021 and hope everyone gets that hug we all so desperately need!
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures for more information.