January 2021 - Lessons of 2020
By: Kyle McBurney, CFP
Managing Partner
In the early part of the year, as the faint echo of a strange virus grew louder and louder, I noticed a phrase becoming more and more ubiquitous when speaking with analysts and economists – And this, too, shall pass.
I fell in love with this phrase. It became my war cry against the daily slog of one stomach-churning day after another. I used it with clients, family, and, of course, myself. After all, everything was moving so quickly, and for the worse. While we were all dealing with the stressors associated with working from home, remote learning, empty toilet paper aisles, and constant sanitization, markets went from peak to trough in February and March in a record 33 calendar days – 3 times as fast as the 1987 bear market. It was one gut punch after the next.
And this, too, shall pass.
As is my habit, I wanted to know the origin of the phrase and how it has become prevalent in our vernacular. What I found was fascinating.
In September of 1859, before he was president, Abraham Lincoln gave what was supposed to be a mundane speech to Wisconsin Farmers at the Wisconsin State Fair. The day had called for dialogue around agriculture and farming, with a few comments thrown in on policy. However, with the nation on the precipice of a devastating civil war, Lincoln’s address veered into the profound. As usual, he made his point by telling a story. Honest Abe told the story of an Eastern King who asked his wisest philosophers to provide for him a sentence that would be not just true in every situation but also always worth hearing and remembering. They presented him the words: “And this, too, shall pass away.”
“How much it expresses,” he exclaimed, “How consoling in the depths of affliction!”
Well stated, Abe. Perfect.
While this newsletter is normally forward-looking, I hope is that we all take a moment to reflect and remember lessons learned in 2020. Through it all, this was a year that rewarded investors who remained patient and focused on the long-term. It punished those who sold amidst panic, as well as those “experts” who wanted to wait for the dust to settle – a strategy that so rarely works. Patient investors who hung in there, tuned out the noise and maintained their long-term strategy were well rewarded. An equally historic and dizzying comeback followed the historic downturn. Since the March low, the S&P 500 is up more than 65% and up 18% for the year. The Nasdaq, incredibly, is 45.7% higher for the year.
I genuinely hope that the stock market of 2020 stays in our collective memories for some time. After all, the only future certainty is uncertainty. Market shocks are inevitable. Pullbacks lead to noise on social media, newspapers, on TV, blogs, radio, just about everywhere. Yet all bear markets have one thing in common: they end.
Intelligent investors, legendary investor Benjamin Graham once insisted, don’t need superior intellect, training, or expertise. Instead, he asserted, market intelligence consists of patience, independence, and self-control.
Thus, the next time we feel rattled or panic, remember that sentence, which is always right and meaningful – and this, too, shall pass away.
Oh, and the next time we get a pandemic, remember to avoid touching two things – your face and your long-term equity exposure.
How it All Ended – 2020 Benchmark Returns
And thus, 2020 is in the books.
Equity markets across the board moved higher in December, reaching historical levels to close out a roller coaster year. Let the superlatives roll! The S&P 500, Dow Jones Industrial Index, and Nasdaq Composite all rose to record levels – with the S&P closing above 3,700 and the Nasdaq inching its way closer to 13,000. Markets roared higher in December on the back of optimism surrounding the most recent round of COVID-related stimulus and vaccine approvals/deployment.
Charts of the Year –
1) Explosion of M2 Money Supply (Cash and Cash Equivalents)
Source: Strategas
One question that we often receive revolves around the dramatic disconnect between a rallying stock market and a devastated economy with over 10 million jobs lost. The critical point is that we have endured an economic recession, but not an income recession. Discretionary income, including personal savings, dramatically increased during the pandemic. In savings account alone, there has been an increase of +$1.3 trillion. Of course, we know why this is the case. The extra liquidity from the unprecedented levels of fiscal stimulus pushed markets upwards and kept economic catastrophe at bay.
All this new cash also helped draw in a new cohort of investors, many young and first-time investors. Software company JMP estimates that the brokerage industry added 10 million new accounts in 2020—6 million from the trading app Robinhood alone. These remarkable numbers reflect just how much money the CARES Act created and how much of it was ultimately directed into the stock market. After all, remember T.I.N.A – with rates as low as they are, There Is No Alternative.
This chart is my #1 referenced graph when clients ask me to summarize 2020’s seemingly Bacchic rally. Such an explosion of money in the system absolves many other economic sins and stock market concerns. With more stimulus recently deployed, this is an undeniably bullish theme for markets in 2021.
2) US Fiscal Stimulus and Lessons from the Global Financial Crisis
Source: Strategas
I love this chart from Strategas. It correctly summarizes the size and scope of the fiscal response to the pandemic and subsequent economic shutdowns. In contrast to the slow pace of stimulus in ‘08, trillions of dollars in fiscal stimulus were doled out almost immediately, with more still on its way.
Policymakers learned two valuable lessons from the global financial crisis:
1) Spend Fast
2) Spend Big
Also, let’s not overlook the Federal Reserve’s importance, promising not to raise rates until 2023. Don’t fight the Fed!
3) Working from Home
This chart is a bonus. In this new world of ours, I found it to be fascinating and somewhat surprising. Does anyone think this new work-from-home model isn’t here to stay? The development is bullish for stocks like Zoom. (And it is bullish for continued interruptions by a 2-year-old.)
What I am Watching – First Half Correction?
In the world of economic prognostication, 2020 reminded us that forecasts are just that, forecasts. Last year, for example, the most significant risks were trade relations with China and the upcoming November election. Very quickly, both topics fell off the radar, replaced by all-things-pandemic and economic shutdown. If anything, all these examples of forecasts gone wrong are yet another reminder that the smartest investors and strategists are almost always proven wrong by markets. I suppose that is what makes this career so enjoyable. It is never dull or predictable.
With this in mind, it is still our job to look ahead and make our best projections. As you all know, I like to use history as our guide. Nine months off the March lows, prior markets may provide some valuable insight on the path forward. I found the below chart particularly insightful.
Source: Strategas
This look back tells us two important things about the next three quarters –
1) Expect more volatility and a pullback in the range of 10%
2) Despite any correction, hang in there, as markets are likely to end the year higher
In our opinion, any bumps or bruises to start 2021 reflects a healthy market rebalancing itself. We saw a similar trend in ’10 and ’83 – markets were slightly more volatile, with investors more cautious until the advancement ultimately resumed.
Allocation Update
Despite historical trends giving us the “green-light,” we remain well-diversified with a slight overweight tilt towards stocks. Our modest overweight is a result of stock market growth and cash investment. As mentioned last month, the cash we raised before the election has been redeployed back into equities. Following November’s vaccine developments, we moved more into small-cap and value stocks. As we progress through 2021, we expect this trend to continue.
As risk managers, we are aware of stretched equity valuations and timing uncertainty around vaccines and economic reopening. While forecasters are becoming more and more bullish heading into 2021, we are aware of the risk of overconfidence. As I write this, we are not convinced that sentiment is in the danger zone, but we appear to be heading in that direction. Such excessive optimism will likely be humbled one way or another. Perhaps it will be a slow rollout of the vaccine. It certainly wouldn’t stretch our imagination to see a pullback very early in 2021, especially following such a massive rally in Q4. We will likely view any pullback in the range of 10% as a buying opportunity for equities – we are bullish in the long term. We will likely view any market pullback as an opportunity to pick up some outstanding companies and sectors. Of course, we will keep you updated along the way.
I hope that you all had a wonderful holiday season and New Year. It all felt a little different this year, but we did our best at the McBurney household. Like my own, I am sure your holiday was filled with a few Zoom calls and more cookies than usual. Either way, we made it work. This year was the first year that Teddy understood “Christmas”; he quickly became a huge fan of Santa. He would remind his Mom and Dad – “Santa big truck present please” at every chance he could get. Smart kiddo. From my perch, toy trucks are, and will forever be, in a massive bull market.
Speaking of Teddy, today marked his first day of school. I expect that I had a similar experience as many of you once had: some butterflies, some excitement, and a hand sore from being clenched by a nervous two-year-old. His first day was mixed, as expected. It was a good start, followed by a disastrous middle, and a good end (sounds like the 2020 stock market!). Teddy was in rough shape when he returned home, but I suppose that eventually, this, too, shall pass away.
Cheers to 2021! May we all have a happier, healthier year ahead. There is light at the end of this tunnel!
As always, I welcome any and all thoughts and criticisms.
Best,
Kyle M. McBurney, CFP®
Managing Partner
The opinions expressed herein are those of Kyle McBurney, CFP as of the date of writing and are subject to change. This commentary is brought to you courtesy of Highland Peak Wealth which offers securities and investment advisory services through registered representatives of MML Investors Services, LLC (Member FINRA, Member SIPC). Past performance is not indicative of future performance. Information presented herein is meant for informational purposes only and should not be construed as specific tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, it is not guaranteed. Please note that individual situations can vary, therefore, the information should only be relied upon when coordinated with individual professional advice. This material may contain forward looking statements that are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Referenced indexes, such as the S&P 500, are unmanaged and their performance reflects the reinvestment of dividends and interest. Individuals cannot invest directly in an index.
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