Was 2020 a Dream?

January 21, 2021

I want everyone to close their eyes and go back to December 31st, 2019. Wildfires had scorched a huge chunk of Australia, Tom Brady won his 6th Super Bowl; Tiger Woods returned to golf to win his 5th Masters; Bradley Cooper and Lady Gaga’s lusty Oscar performance; and the series finally of Game of Thrones.

Fast forward from that day up to December 31st, 2020. If you took a long nap throughout the year and woke up and told you that the stock market ended up the year double digit gains, what would you think?

You would probably be pretty happy, I know I would be. If it would only be as simple as to sleep through the roller coaster year we had! As I start year number 26 of my career, just when I think I saw everything, 2020 comes along! To recap, let’s see what 2020 brought us:

  • The S&P 500 (500 largest US companies) experienced a drop of 35%
  • The S&P 500 experienced an increase of 65%
  • The S&P 500 experienced its fastest-ever bear market (defined as a drop of 20%), clocking in at just 33 days before its third-fastest recovery to a breakeven level in about five months.
  • The Dow had several day-to-day swings of about 2,000 points.
  • The S&P 500 rose or fell by at least 1% on twice as many days in 2020 than it did, on average, since 1950.
  • The S&P 500 set 33 record highs in 2020.
  • The S&P 500 finished up around 16% for year with 11% of that return coming in the last quarter, meaning that 68% of the S&P 500 return for the year came in the last 3 months of the year.

As you can see, if you got caught in the daily/monthly market swings of 2020, it was a very emotional roller coaster that you could have experienced with some pretty powerful emotions (fear, greed, and panic to name a few).

From a health standpoint, fear was a big emotion for most people in 2020 and still is today. In the beginning stages of this virus, no one was exactly sure how infectious it was, how deadly it was, or how you could get it. Most people were pushed into seclusion and unable to see friends or loved ones, and still are today. It has been over a year since I have seen my mother and stepfather in Florida and I am looking forward to the day that I get to give them a hug again – things I will never take for granted ever again!

So, yes there was a lot to be fearful of with this spread of the virus, but this past election also caused a LOT of emotion no matter who your candidate of choice was. There was a lot of uncertainty, and many times people confused market risk with political risk which I addressed in my previous article.

What it comes down to is this, no one can accurately predict short-term market moves, and investors who sit on the sidelines risk losing out on periods of meaningful price appreciation that follow downturns. Every S&P 500 decline of 15% or more, from 1929 through 2019, has been followed by a recovery. Notice I did not say most or a lot, I said every. The average return in the first year after each of these declines was 54%.

As you know, we were pretty active at New England Capital year. In addition to watching over the portfolios and investments, we were here for you when you called or emailed. We also reached out to many of you throughout the year to check in to see how you were doing and to listen to you. It was reassuring to us with many of you and how much confidence and trust you put into our firm, and we take that very seriously. As fiduciaries, we are always working in your best interest and treat your money the same way we treat ours.

While almost all of the clients stayed the course, a common emotion this year that we heard was fear, and should we move the money to something more conservative (or cash) until we get more certainty in the election and the markets. Unfortunately, by doing that, by the time we have “direction” the market has already moved up and you would have missed out on some big returns (take the huge increase in the last quarter for example). Even missing out on just a few trading days can take a toll. A hypothetical investment of $1,000 in the S&P 500 made in 2010 would have grown to more than $2,800 by the end of 2019. But if an investor missed just the 10 best trading days during that period, he or she would have ended up with 33% less.

Remember that market drops (WHATEVER the reason may be) are very normal. Stocks have risen steadily for most of the last decade, but history tells us that stock market declines are an inevitable part of investing. The good news is that corrections (defined as a 10% or more decline), bear markets (an extended 20% or more decline) and other challenging patches haven’t lasted forever as seen in this graph which I have showed before.

I do think of the lessons that I have learned in 2020, though while history may not repeat, it does rhyme! Your broadly diversified portfolios are designed to participate in the gains when the market is rising and to minimize, as much as possible, the declines when markets sell off. As always, if you have questions or concerns (or if your investment objectives have changed) please reach out to us either by phone or email. We are and will always continue to be here for you.

In closing, I want to take the time to thank all of the front-line workers who have risked their lives for all of us. Not only do I consider healthcare workers front line, but also the teachers, food industry, delivery drivers and everyone else who this kept this nation moving!