In the darkest days of March 2020, no one could have predicted how Dec. 31, 2020 would look – especially not in the stock market.
For some time in March, it was impossible for anyone to say with certainty how things would play out in the weeks and months to come, financially or otherwise. From Feb. 20 to March 23, the S&P 500 index saw the fastest, steepest decline ever, dropping 34% in 23 trading days. Eleven trading days later, the index had rebounded more than 20%, and it ended the year up over 68% from its March lows. You could have blinked and missed the worst of the downturn.
Other asset classes followed similar patterns, leading to once-in-a-lifetime volatility. Yet despite steep declines, most asset classes ended the year with positive returns. Further oddities in this year’s market included seeing oil prices briefly go negative (meaning certain investors had to pay someone to take delivery of oil from them) and U.S. Treasury yields hitting all-time lows, as the Federal Reserve flooded markets with cash and investors flocked to safety.
Many observers asked how it was possible for stocks to climb during a pandemic and associated recession, when so many people around the world are out of work and struggling. While the situation is counterintuitive at first glance, that doesn’t mean stock prices were not grounded in reality. To understand why, it is important to consider a few factors.
First and most importantly, stock prices look to the future. The past, and even the present, are irrelevant for the most part. Despite all the bad news in 2020 – and there was plenty – investors saw reason to hope. Government intervention and $4 trillion of stimulus kept many businesses afloat. Regardless of whether you believe the federal government could have or should have done more in the past year, the stimulus that it did offer created real support for the economy.
Second, while it was a tumultuous year politically, once Joe Biden secured the Democratic presidential nomination, the biggest political uncertainty for investors diminished or vanished altogether. As I wrote in October, while Biden and then-President Donald Trump have wildly different priorities, there was no reason to think either of them would enact policies hostile to businesses, especially as the pandemic continued. Elections do, indeed, have consequences. But the market had largely factored in these possibilities long before November.
Meanwhile, scientists and researchers threw themselves into searches for treatments and vaccines for COVID-19. A steady flow of good news led investors to believe that this pandemic would be behind us in the not-so-distant future. This was the first time I ever saw market moves based on medical news, and I doubt we will see it again outside the context of the pandemic. But a relatively fast vaccine development time, as well as positive treatment developments, offered real hope within months. Without an effective vaccine, the prospects of the economy bouncing back would have been slim. This development was arguably the single most important factor in the optimistic market outlook.
None of this is to say that the market forecast is unfailingly rosy for the year ahead. This winter is already shaping up to be difficult in many parts of the country. The vaccine rollout has been messy and uneven. While many observers hope for improvement, the slow start could delay a more widespread return to normal.
The market faces other uncertainties ahead, too, unrelated to the pandemic. The future of interest rates is something of an open question. Federal Reserve Chair Jerome Powell recently said that the time to raise rates “is no time soon.” Yet Fed officials and private analysts alike have suggested that economic activity may jump in 2021 as the vaccine becomes widely available. There is also the potential for rising inflation, though such spikes may prove short-lived.
For now, though, while some individual stocks may be overinflated, investors with a diversified portfolio have less to worry about than most would have guessed in early March. With the rollout of vaccines already beginning, life could begin returning to something like normal by this summer. As it does, consumers may begin spending on all the things they couldn’t during the pandemic, including travel, meeting at bars or restaurants, and other in-person activities and experiences. All this activity should lead to job creation and a more balanced economy.
No one has a crystal ball; this is as true today as it was in March. Even so, we have survived one of the most surprising years of market performance of our lifetimes. With any luck, 2021 will meet our expectations – at least in being a clear improvement over 2020.
Posted by Paul Jacobs, CFP®, EA
photo by Flickr user nakashi, licensed under CC BY-SA
In the darkest days of March 2020, no one could have predicted how Dec. 31, 2020 would look – especially not in the stock market.
For some time in March, it was impossible for anyone to say with certainty how things would play out in the weeks and months to come, financially or otherwise. From Feb. 20 to March 23, the S&P 500 index saw the fastest, steepest decline ever, dropping 34% in 23 trading days. Eleven trading days later, the index had rebounded more than 20%, and it ended the year up over 68% from its March lows. You could have blinked and missed the worst of the downturn.
Other asset classes followed similar patterns, leading to once-in-a-lifetime volatility. Yet despite steep declines, most asset classes ended the year with positive returns. Further oddities in this year’s market included seeing oil prices briefly go negative (meaning certain investors had to pay someone to take delivery of oil from them) and U.S. Treasury yields hitting all-time lows, as the Federal Reserve flooded markets with cash and investors flocked to safety.
Many observers asked how it was possible for stocks to climb during a pandemic and associated recession, when so many people around the world are out of work and struggling. While the situation is counterintuitive at first glance, that doesn’t mean stock prices were not grounded in reality. To understand why, it is important to consider a few factors.
First and most importantly, stock prices look to the future. The past, and even the present, are irrelevant for the most part. Despite all the bad news in 2020 – and there was plenty – investors saw reason to hope. Government intervention and $4 trillion of stimulus kept many businesses afloat. Regardless of whether you believe the federal government could have or should have done more in the past year, the stimulus that it did offer created real support for the economy.
Second, while it was a tumultuous year politically, once Joe Biden secured the Democratic presidential nomination, the biggest political uncertainty for investors diminished or vanished altogether. As I wrote in October, while Biden and then-President Donald Trump have wildly different priorities, there was no reason to think either of them would enact policies hostile to businesses, especially as the pandemic continued. Elections do, indeed, have consequences. But the market had largely factored in these possibilities long before November.
Meanwhile, scientists and researchers threw themselves into searches for treatments and vaccines for COVID-19. A steady flow of good news led investors to believe that this pandemic would be behind us in the not-so-distant future. This was the first time I ever saw market moves based on medical news, and I doubt we will see it again outside the context of the pandemic. But a relatively fast vaccine development time, as well as positive treatment developments, offered real hope within months. Without an effective vaccine, the prospects of the economy bouncing back would have been slim. This development was arguably the single most important factor in the optimistic market outlook.
None of this is to say that the market forecast is unfailingly rosy for the year ahead. This winter is already shaping up to be difficult in many parts of the country. The vaccine rollout has been messy and uneven. While many observers hope for improvement, the slow start could delay a more widespread return to normal.
The market faces other uncertainties ahead, too, unrelated to the pandemic. The future of interest rates is something of an open question. Federal Reserve Chair Jerome Powell recently said that the time to raise rates “is no time soon.” Yet Fed officials and private analysts alike have suggested that economic activity may jump in 2021 as the vaccine becomes widely available. There is also the potential for rising inflation, though such spikes may prove short-lived.
For now, though, while some individual stocks may be overinflated, investors with a diversified portfolio have less to worry about than most would have guessed in early March. With the rollout of vaccines already beginning, life could begin returning to something like normal by this summer. As it does, consumers may begin spending on all the things they couldn’t during the pandemic, including travel, meeting at bars or restaurants, and other in-person activities and experiences. All this activity should lead to job creation and a more balanced economy.
No one has a crystal ball; this is as true today as it was in March. Even so, we have survived one of the most surprising years of market performance of our lifetimes. With any luck, 2021 will meet our expectations – at least in being a clear improvement over 2020.
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