Quarterly Update

It’s almost a cliché at this point to say that 2020 was a challenging year, financially and emotionally. Lives lost, but also livelihoods. The year also seemed to show a major disconnect between market performance and everyday reality. That disconnect was a popular topic throughout an eventful and consequential year.

The coronavirus took center stage, of course, with case counts in the US approaching 20 million and 340,000 deaths as we ended the year. Close behind was social and political unrest and violence in the streets. We even managed to sneak in a presidential impeachment trial, a Supreme Court nomination, and a General Election. And we can’t forget our fourth year of fires and smoke-filled skies. Quite the year indeed!

Even though it turned out well by year-end for stocks and bonds, 2020 was also one of the most volatile years on record. The year began strong but the emerging pandemic and stay-at-home orders in early Spring created lots of confusion for everyone. Investors the world over didn’t know what to think. Extreme anxiety and bouts of panic led to wild swings for major market indexes. In March, the Dow experienced some of its largest daily percentage declines in history (down 8, 10, or even 13%) often immediately followed by some of its largest daily percentage gains (up 7, 9, and 11%).

The bond market also struggled at times, especially during March. In a sign of complete panic, investors even shunned US Treasurys for several days during the worst of the virus confusion. Ultimately, the Federal Reserve and eventually Congress stepped up to backstop markets and the economy with trillions of dollars of aid. This emergency support was probably the single most important event for markets during 2020. Who knows where we would have ended up without it? But aid markets it did, and stock and bond prices recovered rapidly and performed surprisingly well, on average, over the remainder of the year.

Here’s a roundup of how major markets performed during Q4 and for the year, respectively:

  • US Large Cap Stocks: up 12%, up 18%
  • US Small Cap Stocks: up 31%, up 20%
  • US Core Bonds: up 1%, up 8%
  • Developed Foreign Markets: up 16%, up 8%
  • Emerging Markets: up 20%, up 19%

This positive performance was not evenly distributed, however. Investors clearly favored industries that stood to benefit from stay-at-home orders while punishing others. The tech sector was a clear outperformer, rising 44% for the year. Consumer Discretionary and Communication Services also fared well. Energy performed worst, showing a decline of 34% for the year due to demand uncertainties. But this could have been much worse given that the price of oil went negative in April for the first time in history. Commercial Real Estate and Financial Services also performed poorly, declining about 2% each during 2020.

But according the Congressional Budget Office, the CARES Act passed in March coupled with the recent year-end aid package could backfill nearly 8% of the estimated 10% hit to GDP caused by the pandemic. Currently, the CBO and others are expecting our economy to recover by 2022. All this aid plus extremely low interest rates, various programs from the Federal Reserve, and expectations for further stimulus from Congress are helping investors to carry this optimism into the new year.

There’s lots of downside risk to this positive market outlook, however. We’re obviously still deep within a renewed wave of the pandemic and the economic impacts are unfolding. Roughly 14 million are still unemployed or underemployed and many jobs lost won’t be coming back. Yelp indicates that around 60% of restaurants closed due to the pandemic won’t reopen. Millions are at risk of eviction or foreclosure and it’s unclear who will ultimately foot the bill for missed payments. So, even assuming the CBO is correct, the road to full recovery will be long and bumpy for many.

Additionally, while typical investors aren’t overly bullish right now, some retail investors have started day-trading again. This helped margin debt (money borrowed against stocks to buy more stocks) hit a record near year-end. Investors on margin can be forced to add money to a declining portfolio or sell stocks to pay off their debt. The latter tends to exacerbate selling pressures, so any near-term volatility could be heightened at times, even as market prices march higher.

Last year was tough for many in a variety of ways, no doubt about it, and this brief letter only scratches the surface. Let’s hope 2021 proves to be a better year for all. As always, please let me know of any changes to your plan and questions that come up along the way.

Brandon Grundy, CFP®

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