Many people have called 2020 unprecedented, and they’re not wrong. From an investor’s perspective, 2020 was like nothing that has happened before. An even bigger and more important takeaway from the past year is the importance of investing for your long-term goals and circumstances.
2020 is a perfect example of why you don’t want to try to time the market.
Last year at this time, if I had told you the year would start out great … but by the end of the first quarter, we’d be experiencing the black swan event that was the pandemic, resulting in unemployment rising to more than 20%, the gross domestic product dropping more than 10% (double its drop in 2008-2009), the stock market falling 35% and the government mandating business closures – all followed by the equity market finishing the year over 10% … you wouldn’t have believed me. No one would have.
What created the quick recovery and helped the economy snap back were the Federal Reserve response to interest rates, fiscal response from Congress and Paycheck Protection Program, which was offering federally guaranteed loans to help businesses keep workers employed amid the pandemic and economic downturn.
A Year of Surprises
There were many surprises, and 1 of the biggest was how violently corporate credit negatively responded to the market. It took a lot of fortitude to stick with that in 2020, and it came back.
Equity markets are accustomed to volatility, but bond markets aren’t, and there was equity-like volatility in bonds.
Still another oddity was that while growth stocks have performed so much better than value stocks over the last 10 years, value stocks have done better over the last couple of months. Yet, I don’t think the allure of growth is going away.
Also, while large-cap stocks typically do better than small- or mid-cap stocks, over the last couple of months, small and mid have been doing better than large. Part of the rotation is due to better valuations and price earnings ratios, but I don’t know that it will last.
Going into 2021, investors are most concerned about:
- Possible sell-off in the equity market due to impaired growth brought on by a coronavirus resurgence combined with already high equity valuations
- A new presidential administration
- Prospect of increased corporate taxes (as tax rates increase, earnings per share tend to decrease)
To a degree, the equity market has become programmed to understand that if something goes wrong in the economy, the Federal Reserve makes money cheap, corporations borrow cheap money, and everything is fine and dandy after that.
Then the government comes out with a fiscal stimulus package to help people gain access to cheap money. During the last financial crisis, the Fed lowered rates to zero from 2008 to 2015. Rates were slowly starting to creep up, but with the pandemic, they quickly dropped back down to zero. I don’t think anyone expects rates to rise in the next year or 2.
This leaves investors nowhere to run, because if you sell equities and go into bonds, the interest return on bonds is very low. The reality is, this low interest rate environment is pushing people to invest in stocks, possibly creating more risk in portfolios than investors intended.
Words to Invest By
Ultimately, what it all boils down to is, for people with 20- to 40-year time horizons, it’s irrelevant whether 2021 is a good or bad year for the stock market. Even if you’re 65, your time horizon is still 25 years. If you’re 75-80 years old, you’ve typically turned the dial to be more conservative over time and slowly decrease your appetite for volatility.
The best investment advice I can give is for investors to commit to how much to save, keeping long-term goals in mind, and then ignoring everything else that happens in the short term.
Some people look at day-to-day movements in the market, but all that does is create unnecessary anxiety. All news stories about the markets can do is report on what happened in the past. There’s not 1 that can give an accurate forecast of the future.
If you need to move your investments to make them consistent with your long-term goals, then by all means, do so. You’re only gambling if you try to guess what the market’s going to do over the next 12 months.
Greg Sweeney, CFA
SVP/Chief Investment Officer
Not FDIC insured | May lose value | Not financial institution guaranteed | Not a deposit | Not insured by any federal government agencyThis article has been written for the general information of clients and friends of Bell Bank. It is not intended, nor may it be relied upon, as tax or legal advice with respect to any matter. This article also cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service or other taxing authority.