Now that 2020 is over there are many who would rather not look back! Certainly 2020 will be remembered as a challenging year as many Americans and many around the world struggled both with the disease of Covid and the economic devastation of Covid related shutdowns, which threw millions out of work and into stress and uncertainty. Strangely, in the midst of the struggle, the stock market had a good year. This seeming contradiction, a good stock market in a bad year, is worth reviewing for investors as we learn lessons from 2020 and consider the implications for the future.
2020 included many records in the market and not all of them good. March of 2020 had the fastest drawdown to cross the 20% ‘bear market’ market, dropping even faster than the market during the 2008 financial crisis. It also included eight of the top ten one-day point losses in the Dow Jones History. For those of us who lived through the drop, it was very fast and challenging.
When we met in March for our 2020 Investor Conference the crisis was just beginning and we shared some expectations for the crisis, noting that there are different types of bear markets. Our expectation was that the Covid crisis was an “event”, not structural or cyclical to the economy or stock market, but an outside event like a natural disaster that impacts stock prices. We also noted that event driven market declines tended to be characterized by very steep declines followed by very steep recoveries as the ‘event’ passes. The actual result in the market appears to have followed that path as the market plummeted and then grinded higher to set new records before the year was out.
How could the stock market rise while millions were out of work? The answer lies at least partially in the tremendous monetary and fiscal stimulus that the Federal Reserve and Congress poured into the economy. The Federal Reserve announced liquidity measures that exceeded those of 2008, pouring billions of dollars into the economy and intentionally driving interest rates to record lows. Congress passed the Cares Act, which gave support payments directly to individuals, increased unemployment benefits to those unemployed, and provided loans to small businesses. The CARES Act was so large that it is difficult to comprehend. The payments provided by the government in the CARES Act were greater than the lost wages from the virus. As a result, American’s disposable income actually increased in the midst of the virus.
By the end of April we noted that the market was looking to “The Other Side of the Valley”, decoupling from virus news and anticipating a recovery even before the economic numbers began to improve. Indeed, by July we noted that “Covid cases are up but the market doesn’t care”. By the end of the year vaccines were available and markets continued to hit new highs in anticipation that the crisis will soon be over. Of course, we enter 2021 with a tremendous amount of good news ‘baked-in’ to current stock prices. Markets are expecting a receding virus, continued stimulus, stable interest rates, and recovering earnings. We will discuss 2021 next week as we consider where we go from here.
For now allow me to take a moment to thank you for your continued trust and confidence. 2020 was indeed a challenging year, but I am proud of how we weathered the storm. Let’s hope for a brighter 2021!