Understanding this Crazy Year in Investing
There is a surreal quality to life these days. As the 2020 year began – which seems so very long ago — the U.S. economy was humming. Unemployment was at a 50-year low; investors continued to benefit from the longest bull market in history; and, with the Chinese trade war tensions subsiding, the 2020 outlook was promising.
Then, the lights went out when a barely understood coronavirus instantly closed economies around the globe. Suddenly, most Americans were sheltering in place and nonessential businesses were forced to close. Records were smashed when nearly 10 million people filed for unemployment insurance in March and the stock market dove from bull to bear status faster than any time in history – just 20 days.
Indiscriminate selling meant nothing was spared. 2020 brought us the fastest bear market in history (-20% in 16 trading days) on its way to a drawdown of roughly 34%. The only word to describe the environment is perhaps the most overused word of the year: “unprecedented.” This wasn’t the Great Depression nor the Great Recession but something completely different. In the blink of an eye, companies had no revenue – zero. Financial models were not just distorted, they were broken.
But stimulus mattered. Many speculated the Federal Reserve (Fed) was out of ammunition, but the doubters were proved wrong. The Fed effectively lowered interest rates to zero, expanded its balance sheet by record amounts and even began purchasing corporate bonds – both investment grade and high yield – to restore function to markets and support corporate borrowing. Congress passed record amounts of fiscal stimulus, including small business lending and direct payments to households, to help lift the economy as it struggled under lockdowns.
After the market’s stunning fall, stocks staged an even more remarkable comeback. The ascent, which began in late March, started to take hold in April and came to a stunning crescendo with the DOW reaching new record highs and breaking through the 30,000 barrier in November for the first time and both the S&P and NASDAQ reaching record highs by year end. The market gains have been driven largely by a handful of superstar stocks with three of the biggest tech giants – Apple, Amazon and Microsoft – accounting for more than half of the market return. The explosion is also attributed to “disruptive innovation” companies that have seen accelerated adoption as a result of the pandemic and the work from home products and services that potentially change the way the world works.
In addition, stocks are forward looking charging well ahead of the economy and analysts’ earnings forecasts. Even as a rebound in global growth is expected and inflation normalizes, lower interest rates may be here to stay for some time. The economic turmoil has prompted the Fed to lower interest rates and convey the intention to keep rates lower for longer possibly through 2023.