A Year in Review

2020 was a year investors will not soon forget. A pandemic, a recession, the end of a more than decade-long bull market (and the beginning of another bull market), all-time highs for US stock indices, lockdowns & working remotely, a tense U.S. presidential election cycle, unemployment spiking more than 10 percentage points in a matter of months—the list could go on for some time. And after all of it, an above average calendar year return for U.S. stocks.

The chart below plots the cumulative return of the S&P 500 Index¹ through 2020, along with some corresponding news headlines.  Although the index finished the year up more than 18%, you can see and surely remember, that it wasn’t a smooth ride.  After hitting all-time highs in February, stock prices plunged as the seriousness of COVID-19 became more apparent and fear levels skyrocketed about its impact on the economy.  March saw a 33.79% drop in the S&P 500 Index as the pandemic worsened. This was followed by a rally in April, and stocks reached their previous highs by August. Ultimately, despite a sequence of epic events and continued concerns over the pandemic, global stock market returns in 2020 were above their historical norm. The US market finished the year in record territory and with an 18.40% annual return for the S&P 500 Index. Non-US developed markets, as measured by the MSCI World ex USA Index,² returned 7.59%. Emerging markets, as measured by the MSCI Emerging Markets Index, returned 18.31% for the year.

As Much of 2020 That Fits on One Page

S&P 500 Index Cumulative Total Return & Headlines

Click for Higher Resolution Photo

Although uncertainty remains about the pandemic and the impact of new vaccines, continued lockdowns, and new strains of the virus, the events of 2020 provided us with many lessons.

• First, it affirmed that following a disciplined investment approach is a reliable way to pursue long-term investment goals. When markets dipped earlier in the year, it became difficult to separate emotions from investing.  Having prudent and robust investment policies outlining both target asset allocations and allowable drift from those targets enabled our clients to readily identify when policies dictated to rebalance their portfolios.  We realize it’s impossible to know exactly when the right time will be to rebalance, but we firmly believe having specific rebalancing thresholds that dictate when to buy into what’s relatively low and sell from what’s relatively high will benefit you in the long term.
• Second, 2020 was also a lesson in how markets continually incorporate new information and changes in expectations. From its peak on February 19, 2020, the S&P 500 Index fell 33.79% in less than five weeks as the news headlines suggested more extreme outcomes from the pandemic. But the recovery would be swift as well. Market participants were watching for news that would provide insights into the pandemic and the economy, such as daily infection and mortality rates, effective therapeutic treatments, and the potential for vaccine development. As more information became available, the S&P 500 Index jumped 17.57% from its March 23 low in just three trading sessions, one of the fastest snapbacks on record. This period highlighted the vital role of data in setting market expectations and underscored how quickly prices adjust to new information.  One major theme of the year was the perceived disconnect between markets and the economy. How could the equity markets recover and reach new highs when the economic news remained so bleak? The market’s behavior suggests investors were looking past the short-term impact of the pandemic to assess the expected rebound of business activity and an eventual return to more-normal conditions. Seen through that lens, the rebound in share prices reflected a market that is always looking ahead, incorporating both current news and expectations of the future into stock prices.
• Third, the coronavirus pandemic underscored the importance of remaining broadly diversified across business sectors and industries. The downturn in stocks impacted some segments of the market more than others in ways that were consistent with the impact of the COVID-19 pandemic on certain types of businesses or industries. For example, airline, hospitality, and retail industries tended to suffer disproportionately with people around the world staying at home, whereas companies in communications, online shopping, and technology emerged as relative winners during the crisis. However, predicting at the beginning of 2020 exactly how this might play out would likely have proved challenging.

In the end, the economic turmoil inflicted great hardship on some firms while creating economic and social conditions that provided growth opportunities for other companies. In any market, there will be winners and losers—and investors have historically been well served by owning a broad range of companies rather than trying to pick winners and losers.

Moving into 2021, many questions remain about the pandemic, new vaccines, business activity, changes in how people work and socialize, and the direction of global markets. Yet 2020’s economic and market tumult demonstrated that markets continue to function, and that people can adapt to difficult circumstances. The year’s positive equity and fixed income returns remind that, with a solid investment approach and a commitment to staying the course, you can focus on building long-term wealth, even in challenging times.