The Lessons of 2020
To our clients and associates,
Once in a very great while, there comes a year in the economy and the markets that may serve as a tutorial, in effect, a master class on the principles of successful long term, goal-focused investing. Looking back, 2020 was just such a year.
On December 31, 2019 the Standard and Poor's 500 stock index closed at 3,230.78. This past December 31 it closed at 3,756.07 - a record high, up 16.3% for the year. From these bare facts you might infer that the equity market had quite a good year in 2020 - as indeed it did. What should be instructive to the long-term investor is how it got there.
From a new all-time high on February 19, 2020 the market reacted to the onset of the greatest public health crisis in a century by going down roughly a third in five weeks. The Federal Reserve and Congress responded with massive intervention, the economy learned to work around the lockdowns, and the result was that the S&P 500 regained its February high by mid-August.
The lifetime lesson here is that, at their most dramatic turning points, the economy cannot be forecast and the market cannot be timed. Instead, having a long-term plan and sticking to it, which is our investment policy in a nutshell, once again demonstrated its enduring value.
Two corollary lessons are worth noting in this regard. (1) The velocity and trajectory of the equity market recovery essentially mirrored the violence of the February and March decline. (2) The market went into new high ground in midsummer, even as the pandemic and its economic devastations were still raging. Both outcomes were consistent with historical norms. Why? Because the market is a leading economic indicator. In other words, it anticipated a recovery in the labor market and economy due to the vaccines that were in development.
Waiting for the pullback once a market recovery gets underway, and/or waiting for the economic picture to clear up before investing, turned out to be formulas for significant underperformance. As is most often the case, the American economy and its leading companies continued to demonstrate their fundamental resilience through the balance of the year, such that all three major stock indexes made multiple new highs. Even cash dividends exceeded those paid in 2019, which was the previous record year. Meanwhile, several vaccines were developed and approved in record time and the Moderna and Pfizer versions went into distribution as the year ended. It appears that the majority of Americans who wish to be vaccinated will be able to do so by the end of this summer, if not sooner.
The second great lifetime lesson of this hugely educational year had to do with the presidential election cycle. To say that it was the most hyper-partisan election in living memory would not adequately express it. Adherents to both candidates were genuinely convinced that the other would, if elected or reelected, precipitate the end of American democracy. In any event, everyone who exited the market or reduced their equity exposure in anticipation of the election immediately realized their mistake. The enduring historical lesson is to never mix up your politics with your investment policy. Historically speaking, returns of the market, while sometimes temporarily hampered by political activity, generally have risen by low double digits over the long term. (Past performance is not indicative of future performance. Loss of principal and/or portfolio value are possible.)
Still, as we look ahead to the remainder of 2021, there remains more than enough uncertainty to go around. Is it possible that the economic recovery and that of corporate earnings have been largely discounted in soaring stock prices, particularly those of the largest growth companies? If so, might the coming year be a lackluster or even a somewhat declining year for the equity market, even as earnings surge? Yes, of course it's possible. Now how do you and I, as long-term, goal focused investors make investment policy out of that possibility? My answer is we don't, because one can't.
While no one has a crystal ball, I see worldwide markets doing well over the next two years. As people throughout the globe are vaccinated, the entire hospitality industry – airlines, cruise lines, hotels, restaurants and resorts - will stage a massive comeback due to the significant increase in personal savings during the pandemic as well as the ever-increasing, pent-up demand. As businesses around the world are allowed to open, the demand for US and foreign goods and services will return to pre-Covid levels. Thus, corporate earnings will improve and stock prices will reflect this. While there will definitely be a rotation of industry leadership as many companies fail to adapt and new companies are formed, a well-diversified portfolio will have exposure to all of this potential growth.
Our strategy, as 2021 moves forward, is entirely driven by the same steadfast principles as it was a year ago and will be a year from now. The Federal Reserve assures us that it is prepared to hold interest rates near current levels until such time as the economy is close to full capacity, – perhaps as long as two or three more years. For investors like us, this makes it difficult to see how we can pursue our long-term goals with fixed income (bond) investments. Equities, with their potential for long-term growth of capital and especially their long-term growth of dividends, seem to be the more rational approach. We therefore tune out volatility. We act. We do not react. This was the most effective approach to the volatility of 2020 and I believe it always will be.
Allow me once again, to thank you for the pleasure and privilege of serving you.
All my best,
Past performance is not indicative of future performance. Loss of principal and/or loss of portfolio value are possible.