Surges in the coronavirus continued, and renewed restrictions on businesses extended throughout the country in December. Economic data reflected a slowing recovery as jobless claims increased and retail sales declined three straight months to close 2020. The exuberance of the holiday season was muted for many, with less travel and smaller gatherings.
On the other hand, the markets have been anything but muted since the bottom on March 23rd, 2020. Stocks have shrugged off negative headlines, appearing to focus instead on:
- Vaccine deployment,
- Fed assurances of continued liquidity with an accommodative monetary policy for as long as it takes,
- The passage of the long-awaited second stimulus package,
- The possibility of more government stimulus to come.
The S&P 500 was up more than 18% for 2020. Globally, the MSCI World Index was at a record high on a 14% increase in 2020. We think it is incredible to have that type of performance when you consider all that happened in 2020. If you take the S&P 500 from the March low, the index increased about 65%. The bull market lasted throughout the majority of the year with nine months of solid gains.
Concentration was the name of the game for the S&P 500 in 2020, with just three mega-cap companies, Apple, Amazon, and Microsoft generating 53% of the index’s total return. In fact, if you excluded the largest 30 companies by market cap, the remaining companies in the S&P 500 generated a negative return in 2020. Information technology accounted for approximately 69% of index return at the sector level, leaving the other ten sectors far behind.
Bonds broadly did well in 2020, especially TIPs, international developed bonds, and investment grade corporate bonds. Investment grade corporates were up 9.9% through 2020. Both investment grade and high yield bond issuance was at record highs in 2020 as, backstopped by the Federal Reserve buying individual bonds, as companies turned to capital markets for their financing needed to ride out the crisis. Investor demand remained high throughout the year, despite low yields.
December performance represented optimism – but as we enter the new year, we may see more focus on the realities of the ongoing COVID pandemic as the deployment of vaccines hit delays. Surges over the holiday season may result in more restrictions in the months ahead, which can dampen the recovery further. GDP has not recovered completely, and in our consumer-driven economy consumer confidence is watched very closely. The Conference Board’s monthly survey, from 92.9 in November to 88.6 in December. Still, investor sentiment is at euphoric levels not seen since right before the tech bubble according to Citigroup’s Panic/Euphoria Index. A slowdown in vaccine rollout and a resulting slower economic recovery, more political turmoil, or other unknown events could quickly reverse sentiment, causing a near-term downturn.
What Should Investors Do?
January has a history of setting the tone for the rest of the year. When the S&P has seen a positive January, roughly 75% of the time, the index has a positive return for the year. This January obviously has more volatility-provoking events scheduled than usual – the vaccine roll-out, the inauguration, and the full extent of the holiday increase in coronavirus cases will all play a role.
2020 was a reminder for all investors about the good and bad of having money in the markets. The quick drop in markets remind us that risk is real, and potentially the most impactful risks out there are the unknowns we can never predict. It also reminds us of the resiliency of the markets, that when drops occur, so will comebacks.
Avoiding volatility may not be possible, but to some degree, mitigating it is. Focusing on diversification that can cushion your portfolio can help to dampen volatility. While, as we mentioned above, a concentrated portfolio in a few mega-cap stocks would have won the race last year, a diversified portfolio tends to smooth returns over time.
The Bottom Line
A new year creates a good point to stop, take stock and make necessary changes to your overall plan and any pieces of the puzzle, from portfolio management to asset location. However, the most important thing to remember is that investing is for the long term and staying invested is what matters.
The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business. The future performance of an investment or strategy cannot be deduced from past performance. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index.