2020 In the Rearview Mirror
By: James C. Denton, CFP®, Managing Partner
December 31, 2020
I sometimes like to go back and read some of my old newsletters, especially those written at inflection points, to see how my views and expectations held up in the future I was predicting. Today I reread my year-end newsletters for the last two years.
First, December 2019; I can’t really say “I nailed it”, After all, while the signs were beginning to appear, nobody saw the Coronavirus pandemic coming. But as I read it through, I was more and more taken with just how appropriate it would be if written today. Here’s a link if you want to go back and take a look; to the extent that I was wrong, it turns out that while I was upbeat on market prospects, I under-estimated the ultimate potential existing at that particular point in time. I cited and agreed with a consensus expectation of 6 to 9% returns for 2020 – pretty much an average year.
How did it turn out? Well, after getting off to a pretty good start, by March the pandemic was in full bloom, and we had what turned out to be the quickest bear market in history. We were down 27% from the previous year close. This was then followed by the quickest recovery in history, still underway, and we finished the year up ~60% from the March bottom, and ~15%[1] from the previous year’s close. If you’re looking for a better adrenaline rush, go to Disneyland and buy yourself a book of E-tickets. If you’re just holding on tight, a 15% year-over-year return ain’t bad. And most of our investors did better than the market, with returns in the mid-20’s or better.
Looking back to the end of 2018 I also see some parallels, but one specific comment stands out to me. You probably don’t remember, but the 4th quarter 2018 was, in retrospect although we didn’t know it for sure at the time, a pretty severe correction (bottomed out on Christmas eve) in an ongoing bull market which continued until that March 2020 crash I mentioned above. The overall point of my newsletter then was that while the market was having troubles, economic indicators suggested it would soon right itself (exactly what happened, as it turns out). But to that “specific comment”: “Whatever the cause, the market is … ‘interpreting all news in the worst possible light, and unable to sustain any kind of rally when the news is good’”.
Today, we have pretty much the opposite conditions. The market is almost giddy, ignoring all bad news and looking for reasons to go higher. This is the one red flag from my perspective. Nervous market observers point to high pricing indicators and they are correct but it is easy to dismiss the high price-earnings and price-sales indicators considering where we have come from this year. If there is any reason to be optimistic about solving the coronavirus problem, then it is reasonable to have positive expectations for the economy, and therefore the stock market. But when everyone gets positive at the same time, that’s when valuations get stretched and some correction[2] is to be expected, and ultimately is inevitable.
This is where we are right now, in my opinion. You’ve heard me say it over and over again … “There’s always a correction out there somewhere”. We are overdue. Not on a calendar basis, and that’s an important distinction. Neither corrections, bear markets or bulls, or any other market events are in any way constrained or driven by the calendar. It’s never “time for (anything)” just because it’s been so long since it last happened, and we’re never “safe” because something happened just last week. But when market actions become overdone, either for better or worse, and a large proportion of the participating population either becomes overly fearful or overly optimistic at the same time, then an attitude adjustment is due, even needed, and the market often will slap you upside the head.
As I have said repeatedly, our investment strategy and asset allocation processes are designed to cope with this expected and normal volatility. It’s neither necessary or even prudent to try to time them because short term market direction is impossible to predict and get right with any consistency.[3] Near-term challenges notwithstanding, I continue to be very optimistic about my 2021 forecast.
First the political outlook. I’m not interested in an old guy #1 versus older guy #2 comparison, I’m not looking to make any comparisons about woulda, shoulda, coulda. The election dust has settled, and the fact is we got older guy #2, what’s it mean?
In my judgment, if we were going to have a change, we got pretty much the best we could hope for from a market participant’s perspective.[4] President-elect Biden ran as a moderate democrat, and from what I have seen so far, at least insofar as his economic team is concerned, I like what I am seeing. Janet Yellen is an absolute home run as a Treasury Secretary nominee, and as for the rest of the advisory team, of those I recognize, they are fairly level-headed centrists. The fact that the senate did not go the way the liberal crowd wanted is also a positive. Even if both of the Georgia races go Democrat, there still will not be the critical mass needed for there to be any likelihood of major legislative upheaval. There will be some tinkering in tax rates, deductions and credits, but the Democrats will have every bit as much difficulty in eliminating the Trump tax act as did the Republicans with Obamacare. Similarly, without commenting on the political or practical elements of the Green New Deal, we don’t have to worry about the negative economic impact that it surely would have entailed.
And the economic forecast? The world is different now than it was a year ago, and like the coronavirus, will continue to evolve and mutate. A lot of businesses, and with them, jobs are gone and will never come back. But a lot of new businesses, and new jobs, have been created, and some jobs have gotten better as a result of lessons learned and changes adopted. Bottom line – we have a resilient economy and we have a resilient workforce. Some people will excel as a result of the pandemic who might not have otherwise. Some people will be forever handicapped who might have been great successes in the old world. Thus has it always been, and shall it forevermore be. That’s pretty much the definition of capitalism.
But as the coronavirus runs its course and dissipates, and as old businesses reopen and new businesses prosper, we will recover and the market will reflect that recovery. The market is forward-looking; what has happened is meaningless except as it informs future expectations. And the market is telling us that its future expectations are positive in a meaningful way. There’s a saying on Wall Street, “Don’t fight the tape”. It means, market momentum is your friend. More money is made by going with the existing flow, than there is predicting and fighting against it. And the flow right now is positive and strong. There will be good days, and there will be bad, but the market ultimately will continue to reward the patient and disciplined investor.
Call me if you’re up for a review of your personal portfolio or plans. Otherwise, have a happy New Year. I believe 2021 is going to be a lot better than 2020 for your quality of life if not for your investments.
[1] Performance cited is for the S&P 500 Index, the most widely followed of numerous market measures.
[2] The best definition I can give you for the term, “correction” is, “A short-term reversal in investor sentiment”. Corrections happen in bull as well as bear markets, and in this sense they are positive events in that they give a temporary pause in market moves in either direction which are driven by investor sentiment but which are not necessarily justified by economic conditions. These pauses often bring about a degree of objectivity and reduce some of the excesses of fear or greed reflected in market valuations.
[3] We do make adjustments to individual accounts when specific positions become over-weighted, or when we believe a specific holding may have become over-priced, and we will occasionally hold larger than normal cash positions resulting from these sales when we think the overall market is higher than justified. However, we very rarely make large scale adjustments either to individual accounts, or across our portfolio because of anticipated market direction.
[4] Once again, not a value judgment here. Keeping old guy #1 would have brought its own benefits, and its own problems from an investor’s perspective. My point … the election is over, what does the result mean?
The opinions expressed in this commentary are those of the author and may not necessarily reflect those of LPL Financial. This material is for informational purposes only. All performance is historical and does not guarantee future results. This information is not intended to be investment advice for any individual. You should consult with your personal investment advisor before making any decisions based on this information. The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.