2020 STOCK MARKET IN REVIEW: A YEAR THAT DEFIED EXPECTATIONS
The year two thousand and twenty is drawing to a close much like it began: Stocks in a bull market, notching fresh all-time highs. These facts might seem somewhat unsurprising if it wasn’t for the historic events that occurred in the middle, namely the worst global pandemic in a century and the almost shockingly brief bear market that accompanied it.
There are many years that investors easily forget, but 2020 certainly won’t be among them. The S&P 500 has surged almost 65% since its March low and is on track to finish the year up nearly 14%.
The economy’s nascent recovery gets much of the credit for the market’s gains, as does a federal stimulus package, massive amounts of liquidity from the Federal Reserve and the rapid development of multiple Covid-19 vaccines.
Even ignoring the pandemic for a moment, 2020’s stock market defied expectations. The S&P 500 is up more than strategists forecasted this time last year (they called for an increase of about 5%), and it’s even having a better year than its historical average (about 10%). This is all despite a 34% drop in the spring from its February peak.
“One of the big takeaways from this year, after the worst of the pandemic became apparent, was the concept of resilience,” says Lisa Erickson, senior vice president and head of the traditional investments group at U.S. Bank Wealth Management in Minneapolis.
The economy, the stock market and Americans have persevered to various degrees following the “unexpected shocks” earlier in the year, Erickson adds. “People are resilient, and they try to right things to the extent they can.”
With that message of resilience in mind, here’s a look back at this year in the stock market.
STOCK MARKET 2020: BULL, BEAR, BULL
The year will be bookended by two different bull markets, with a short-lived bear market in the middle. That scenario has happened before—most recently in 1987—but the speed of the market’s recovery was surprising but also somewhat typical.
The S&P 500 experienced its fastest-ever bear market, clocking in at just 33 days before its third-fastest recovery to a breakeven level in about five months, notes Sam Stovall, chief investment strategist at CFRA Research in New York. “Then we did what normally happens. Like the messenger from Marathon, the market collapsed from exhaustion,” he says.
The S&P 500 fell 9.6% in a three-week span in September—nearly qualifying as a market correction—before once again rallying into the end of the year. Even with the U.S. elections looming in November and the more recent surge in Covid-19 cases, stock prices have climbed, and the market has reached new all-time highs.
“It goes to show that the stock market is pretty tough to take down,” says Neil Hennessy, chief investment officer of Hennessy Funds in Novato, Calif. “Businesses learn how to make money during good and bad times.”
Back in April, Andrew Mies recalls hosting a webcast with clients to discuss the market and the pandemic. The message wasn’t necessarily to go out and buy stocks, says the founder and chief investment officer of 6 Meridian, a wealth management firm in Wichita, Kan.
Rather, Mies says he was bullish about the success of an eventual Covid-19 vaccine. “Capitalism does work, and it responds positively to challenges. If you have an entire financial community going after a single problem, that’s going to get solved,” he says.
Sure enough, vaccinations in the United Kingdom began in early December, and President-elect Joe Biden has pledged to deliver at least 100 million Covid-19 vaccines in his first 100 days in office.
THE ECONOMY VERSUS THE STOCK MARKET
To people off Wall Street, one seemingly cruel twist of 2020 was the market’s rebound even as the overall economy languished: Nearly 5 million more Americans are unemployed now compared with February, and the end of the U.S. recession that began in February has not been officially determined by the National Bureau of Economic Research, which is tasked with tracking economic cycles.
That’s not altogether unusual, however. Past bull markets, including the prior one that began in March 2009, kicked off while the U.S. economy still was in a recession.
“A big takeaway from what happened this year is that market performance is not always tied to economic performance,” Erickson says. “The market was willing to look at this as a one-time event rather than something fundamentally wrong with the economy.”
However, there were some fundamental changes this year that are likely to be long-lasting. For example, many employees may “start to fight back” on the notion of returning to the office five days a week if they’ve enjoyed working from home, Hennessy says.
And the “wholesale change” in how work gets done could affect the pace of economic growth in the future, Mies notes. That’s because of the cumulative effect from small changes (time freed up from commutes and money saved from eating lunches out) to big ones (commercial real estate deals), he adds. “This shift is going to change things.”
FEDERAL RESERVE, CONGRESS TO THE RESCUE
The stock market rebounded so quickly because investors were encouraged that the pandemic wouldn’t trigger a more severe financial crisis. And that assurance came from the Federal Reserve, which took swift and wide-ranging action to stabilize markets.
In addition to slashing a key interest rate to near-zero by mid-March, the Fed unveiled “an alphabet soup of programs” to stabilize markets, Erickson says. Those included new quantitative easing (QE) measures and backing loans to keep businesses afloat.
“The true leadership of the Fed comes out when there’s chaos and calamity,” says Hennessy. And the central bankers at the helm in 2020 have been “great stewards of the economy.”
Meanwhile, in late March, Congress passed a $2.2 trillion stimulus package to put money into the pockets of Americans and offer relief to business owners. Even amid so much political strife this year, the fact that the legislative branches came together “extremely quickly” was one of 2020’s nice surprises, Erickson says.
And for all the angst about the outcome of the presidential election and the makeup of Congress causing market volatility, politics didn’t end up mattering as much this year as did positive news related to Covid-19 vaccines, Erickson says. “In our mind, 2020 was a great lesson learned in terms of medical developments outweighing political developments.”
However, a 2020 cliffhanger is whether a second stimulus package will get through Congress before year’s end. Fed Chair Jerome Powell has stressed the importance of further fiscal spending to support the economic recovery. And that’s especially important as the number of Covid-19 cases surge, stricter stay-at-home measures go in place in certain areas and extended unemployment benefits are set to expire at the end of December.
“The ability for the economy to fully normalize is dependent on people being able to get out and resume normal activity again,” Erickson says.
TECH STOCKS, DAY TRADERS
This year also saw some significant shifts within the market itself. Even as stock prices careened lower in February and March, many investors started looking for buying opportunities—and they were soon joined by a new-to-Wall Street breed of day traders.
These day traders became much more dominant in the market, wielding a surprising amount of power that caused some angst within the institutional investment world, says Liz Ann Sonders, senior vice president and chief investment strategist at Charles Schwab in New York. That’s because these traders may crowd into a relatively limited number of stocks that then drive the broader market higher, she adds.
“The extremes of speculative fervor have defined the mini peaks and troughs in the market this year,” Sonders says.
What’s more, market participants seized on investment opportunities related to the pandemic’s new normal of more remote work and time spent at home. Shares of companies that benefit from these changes—often in the technology sector—were “clear winners” in the market in 2020, Mies says.
In fact, shares of the heavyweight technology companies led the market out of the bear territory and helped propel the tech-skewed Nasdaq Composite to a new all-time high in June, two months before the S&P 500 did so. That also led to a distortion in the market. Growth stocks (companies that investors expect to grow at a faster rate than the overall market) were outperforming value stocks (those believed to be underpriced) by the widest margin in decades, Mies says.
More recently, though, there’s been a “slow and gradual” shift as investors appear to be favoring value stocks relative to growth stocks, he adds. And that’s partly because tech stocks have lost some luster as the prospect of a Covid-19 vaccine makes a return to a pre-pandemic way of life more realistic.
But no matter which stocks are in or out of favor at any particular time, the market has surged in no small part because stocks offer comparatively attractive returns at a time when interest rates are near-zero, Hennessy says. And that’s one reason so many pros on Wall Street are optimistic about the outlook for stocks heading into 2021.
“The market is going to go higher because there’s no other place to invest your money,” Hennessy says. “At the end of the day, there’s only one playground and that’s the stock market.”
SOURCE: https://www.forbes.com/advisor/investing/stock-market-year-in-review-2020/
