2020 Year End Commentary
Investing at all-time highs.
2020 is in the history books (Thank goodness!). Even though it was a year full of negative headlines, almost every major market index delivered positive returns. We’ll be starting 2021 the same way we started 2020, investing at all-time highs. This has made 2020 surprising to many, including us!
Here are some thoughts on the past year, some thoughts on possible things to come, and what to do about investing at all-time highs.
2020 Market Review
Selected capital market returns for the period ending December 31, 2020.
We followed our process in 2020
We’re big believers in process. Following our process in 2020 helped us do the right thing. When investment plans were disrupted in February and March, we used the opportunity to rebalance. Most portfolios were out of balance, so bonds were sold to buy stocks, and mutual funds were sold to buy exchange traded funds. Timing proved to be fortuitous.
Portfolios rebounded strongly and aggressively after March lows, led by large US stocks and technology companies worldwide. Later in the year, smaller company stocks and international stocks jumped on vaccine news in November and continued their climb into the end of the year, as seen in the table above.
Make no mistake, we have been in a bull market since March. Portfolio values and stock prices are at all-time highs. The market is flush with money from government stimulus. And when high supply meets limited demand, prices go up.
Following process again led to rebalancing once more in December. This time stocks were sold and bonds were purchased. Portfolios are being adjusted to make sure investments stay within risk tolerance and clients have appropriate short-term positions to meet 2021 cash flow requirements.
Looking forward to 2021
With markets at all-time highs and stocks in a bull market that appears unstoppable, we pause to restate that: price is what you pay, value is what you get. Historically, the higher the price you pay the lower your expected return. It’s like buying the latest fashion trends. You pay a steep price to look cool. For comparison, Zoom Video Communications (ZM) – how we spent the holidays with our family – was a mega winner as the world moved to work from home. Investors were paying an exorbitant price in October for this glamour stock. ZM is now down over 40% from its highs this year.
Thus, as we head into 2021, we’re keeping an eye on fundamentals and fighting the fear of missing out (“FOMO”).
2021 Stock Market Expectations
Morningstar estimates that investors are currently buying the high-flying growth stock winners of 2020 at a 20% premium. When expectations are that high small misses in earnings can send the stocks down quickly. We are balancing growth positions with the potential of outperformance from small value stocks as the economy continues to rebound, opens up, and heals as more us of are vaccinated in 2021.
On a relative basis, the US market appears to be trading at a slight premium while the rest of the world is trading at a discount. We continue to expect positive results from overseas investments despite lackluster performance over the last decade.
Overall, consensus expectations appear high. Any small hiccup in the vaccine rollout or continued recovery may send stocks reeling if expectations are not met. Current stock investments should be expected to be held for at least five to ten years to smooth out bumps in return.
2021 Economic Expectations
Where interest rates go from here is anyone’s guess. Though, if they do rise, expect to see losses in your bond portfolio. Bond returns are like a seesaw with interest rates on one end and prices on the other. As interest rates drop bond prices go up and investors earn good returns. The inverse is also true.
Bonds are held today, less for return, and more for stability. Regardless of rates, they continue to be an important diversifier. Despite low rates and, therefore, low returns, US government bonds performed beautifully in March 2020, and gave us the dry powder needed to buy stocks at ultra-low prices.
Nevertheless, with a new $900 billion stimulus package just approved, wallets should be bolstered. It’s another helpful measure to continue the recovery and boost stock market returns further. We’re expecting a recovery in economically sensitive value names to continue their fourth quarter run into 2021.
2021 Regulatory Changes
A new US president is set to take office in January. As we write, the run-off election in Georgia has an unknown outcome, and could have wide implications for your taxes, the market, and the economy. Add that to the massive amount of stimulus and new legislation in 2020, we expect to be doing some detailed financial planning work in the coming year.
We intend to write frequently and in depth on how changes will affect you and your money. There may be large planning implications that we’ll want to work on together. Adapting to change is critical to setting your plans up for success in the coming years. Keep an eye out for our bi-weekly email blogs. They’ll keep you informed.
Investing at all-time highs, a conclusion
When markets hit all-time highs, many investors wonder if they’ve missed the rally and should wait for a pullback. It’s an excellent question. Yet, we don’t know what the future will hold, and the market can keep grinding higher and higher. If you’re not invested, more returns will be missed. In fact, this is usually what happens!
This chart by Dimensional Fund Advisors illustrates the point that annualized returns when investing at all-time highs is not really different than long-term average rates of return.
Investment plans are not built around what will happen in one years’ time. Making tactical calls like waiting for a pullback, or going to cash after a crash tend to hurt way more than they help. After all, investing is for the long-term.
Therefore, as we build and invest client portfolios we always focus on the long-term. We don’t know if a downturn is imminent. Our crystal ball is more like a snow globe. What we do know is that most of us need to be invested in the market consistently for a long time to reach our goals and earn our financial independence. Should that downturn occur we’ll follow the process just like we did in March.
Here’s to getting back to normal in 2021!
The Wright Associates Team
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