2020 is Finally Over!
By: Aaron Anderson, CFP®, CFA, EA
Partner, Financial Analyst
January 14, 2021
Good riddance to 2020! It was the year that never ended. We started the year with impeachment proceedings (yes, that was in 2020!) and then Covid-19 hit the world hard. We social distanced, we wore masks, and we cleaned everything. Due to the economic uncertainty, the market panicked and we had a major selloff. It was hard to sit through, but it also presented an opportunity to buy investments much cheaper than they were months ago, so we repositioned our holdings accordingly.
Then, in late March, the Federal Reserve and Congress decided to prop up the economy to avoid a recession, or worse, a depression. Even though the economy was still struggling, the market then went on a tear and the S&P 500 closed the year up 16%[1] which is quite a bit above the average annual return of 8% - 10%. The lesson to learn from that is the market is forward-looking. Selling because of the issues back in March would have been a big mistake and caused you to sell low. Then, fear as it went back up would have caused buying high when you finally did – the exact opposite of what should be done.
Since Jim’s last newsletter article (please read it if you haven’t), both Senate runoff races in Georgia went to the Democrats which gives them a majority in both branches of Congress and the presidency. However, with the filibuster still in place in the Senate for most legislation and the Senate split 50/50, the ability to make too many changes will be muted.
While the Senate could vote to get rid of the filibuster on all legislation, I don’t think they will. Senate Democrats removed the filibuster on judicial nominations to help get President Obama’s nominees through and then had no way to stop President Trump’s nominees with Republicans in charge. So, minus a little tinkering around the margins, I think it will continue to be business as usual.
Unfortunately, as we start 2021, the hopes of a fresh start due to the vaccine rollout were quickly dashed. I don’t like the seven-day free trial of 2021; can I return it?
My biggest concern around the market is that despite any negative news over the last few months, the market continues going up. Covid spikes across the country … so what. Rollout of the vaccine too slow … no problem. Riots in Washington DC … yawn. This behavior can cause valuations to get stretched and like a stretched rubber band, they could snap back with a correction when a bit of bad news does stick to the Teflon market.
Also, are the future expectations for the economy at the end of 2021 really 16% better than the future expectations were at the end of 2020 when the economy was already going strong pre-virus? I’m not so sure.
But as we saw last year, predicting and timing the market is impossible to do consistently. If one held the Dow from 12/31/1984 – 3/25/2020, the annual return would be 8.46%.[2] This includes the worst one-day crash in 1987, the tech wreck of 2000, the subprime mortgage crash in 2008, and ends at the lowest point of last year. Missing the worst 20 days during that entire 35-year timeframe (not each year) would have increased that to an annual return of 13.79%. Missing the best 20 days would yield only 4.52% annually, almost cutting the returns in half.[3]
Our crystal ball is a bit too murky to allow us to avoid the worst days but also make sure we’re in for the best ones. So, we continue staying the course. As a position becomes too big as a percentage of your portfolio, we will take profits to pare it back. We continue to look for buying opportunities and any correction we get will be a chance to put money to work.
Long-term though, success isn’t based on timing the market, it’s based on time in the market.
[1] Source: https://www.kiplinger.com/investing/stocks/602021/the-best-and-worst-sp-500-stocks-from-2020
[2] One cannot invest directly in an index. “Hold the Dow” in this case means buying the stocks of the Dow 30 index in the same weighting as the index and then mirroring changes in the index. Since this would cost a large amount of money, most individual investors do so through an ETF, although that does have a fee involved that would lower returns.
[3] Source: https://www.nasdaq.com/articles/march-2020-had-the-largest-one-day-moves-since-1985-but-what-does-that-mean-for-investors
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.