Published January 1, 2021
Below is a good recap of the year in investing excerpted from the Wall Street Journal. Our model-driven, long-short approach to investing responded well, protecting us from the worst of the market selloff while participating well in the rebound. We appreciate you, our family of subscribers, and wish you a healthy and prosperous 2021!
“Here is something many investors would have found difficult to believe during March’s stomach-churning selloff: 2020 would turn out to be a stellar year for the stock market. The Dow Jones Industrial Average is at a record. The market for initial public offerings is flourishing. Just weeks ago, home-rental startup Airbnb, Inc. made a stock-market debut so stunning that its chief executive was briefly left speechless on live television.
These are things that would be easy to imagine in boom times. But 2020 has been anything but that for the world outside Wall Street. The cold reality is that the market’s rally has occurred in the midst of a catastrophic pandemic that has killed more than a million people, halted business and travel and wreaked havoc on the economy. Although there are plenty of reasons for the market’s comeback, not the least of which is the Federal Reserve’s massive intervention, the staggering rally is still difficult to comprehend for many investors.
“The path we took to get here is something we never, ever, ever would have foreseen,” said Ralph Bassett, head of equities for North America at Aberdeen Standard Investments.
Here are the lessons investors say they have learned from an unforgettable year.
Markets Don’t Perfectly Reflect the Economy
When stocks bottomed March 23 and began to race higher, many observers were perplexed. Coronavirus cases were surging. Restaurants, stores, and theaters went dark and millions of Americans queued up outside of career centers to apply for unemployment benefits. How could the market be doing so well when the world seemed to be doing so badly?
The answer: The stock market often begins to recover far sooner than the economy. In the case of the financial crisis, U.S. stocks hit their nadir March 9, 2009. But it took seven years from that point for the unemployment rate to fall below precrisis levels.
Similarly, while stocks managed to charge higher in 2020, many economists don’t expect the U.S. to recover all of the jobs lost during the pandemic until 2023 or later.
“A lot of people said the market is disconnected to reality, but stocks are pricing in what’s going to happen in six months to a year,” not what the economy looks like today, said Andrew Slimmon, managing director and portfolio manager at Morgan Stanley Investment Management. In the pandemic, investors who began betting on a stock recovery in the spring weren’t assuming the economy was about to come roaring back—they were assuming things would be better some months down the line than they were at the time. And they were right.
“It’s not until you have this huge rally that suddenly people realize, ‘Oh, the stock market isn’t wrong, I’ve been wrong,’” Mr. Slimmon said.
Forecasts Are Just Forecasts
This time last year, Wall Street’s top strategists identified the biggest risk to the markets as deteriorating trade relations between the U.S. and China. Trade all but fell off the radar for many money managers this year, quickly replaced by concerns about the coronavirus pandemic and the ensuing economic shutdown.
They also widely predicted modest gains for the S&P 500. But by March, analysts at BMO Capital Markets and Oppenheimer Asset Management said they would suspend their year-end targets because of how difficult predicting the market’s path had become. Others slashed their targets after the spring selloff, only to bump them up again after the summer rally. Goldman Sachs cut its year-end target to 3000 in March, then raised it to 3600 in August and to 3700 in November.
Then of course, the elections brought their own missed predictions, most notably that the Democrats would take control of Congress in a “blue wave.” If anything, myriad examples of calls gone wrong show there is plenty of humility to be learned from markets, which regularly prove the smartest investors and strategists wrong.
“You always think about things trending through the influence of typical variables like macroeconomic policy, fiscal policy, global growth…but what tends to happen with big moves is unseen shocks,” Aberdeen’s Mr. Bassett said.
The Tech Trade Is Only Getting Bigger
Investors predicting value would finally unseat growth were proved wrong yet again.
2020 was the year electric-car maker Tesla became the most valuable auto maker in the world. Airbnb made its debut on the public market with a valuation greater than that of Marriott, Hilton, and Hyatt hotels combined. It also was the year when many technology companies disproportionately benefited from a pandemic that has forced individuals to spend more time at home and online. Video conference provider Zoom is up 419% for the year to date, more than 26 times the S&P 500’s gain. Online retailer Etsy has risen 314% while online finance company Paypal has climbed 114%.
To be sure, an investor fixated on growth might have missed out on a number of cheaper, more “old-school” stocks that benefited from the pandemic, such as Clorox or Dominos Pizza. Money managers who are overwhelmingly concentrated in growth stocks also have had the disadvantage of being hit particularly hard during recent market reversals, like in November when Pfizer released promising news about its Covid-19 vaccine. Stocks including Zoom and Peloton had one of their worst days of the year Nov. 9, logging double-digit percentage declines, although they quickly made up ground in the weeks that followed.
But none of that necessarily means 2021 will be the year that growth stocks take a back seat to value. Society as a whole was becoming more technology-oriented, even before the pandemic, Mr. Bassett said. The end of the coronavirus pandemic won’t be a panacea to companies in already struggling sectors such as oil or bricks-and-mortar retail.”
Passage of the second covid-19 stimulus pushed stock markets to fresh records Monday. The S&P 500 rose +0.9%. Stocks gave back -0.2% Tuesday as calls for larger direct stimulus checks met resistance in the Senate. A 14-year high in home sales provided some support for the market. Smallcap shares suffered a much worse -1.9% drubbing. A +0.1% rise Wednesday as cyclical shares showed strength. Stocks closed the year with a +0.6% rise Thursday with much of that move occurring in the final couple of hours of trading.
Another holiday-shortened week saw stock markets pushing to more record highs. The S&P 500 (SPY) added +1.32%, spending the entire week above the 3700 level, while the Nasdaq 100 (QQQ) posted a +1.35% gain. Smallcap stocks (IWM) finally took a breather from their torrid 8-week run dipping -1.48%.
Warm wishes, Happy New Year! and until next week.