You should never try to teach a pig to sing. It wastes your time, and it annoys the pig.
First and foremost, we owe our readers an apology. We usually try to get this year-end commentary out in the first few days of the new year, but 2020 and the New Year had other ideas and upended pretty much everything and everyone. Each time we sat down to pen this missive, it seemed the information was out of date the next day. As such, we decided to wait until the Presidential inauguration was over to publish in the hope that some level of stability might be created. So off we go.
2020 was one heck of a year full of unprecedented events. Racial unrest, COVID, and a historic Presidential Election dominated the headlines. (And while there was no plague of locusts, we did have murder hornets.) In some ways, it flew by. In others, it dragged on forever. There are lots of things to talk about – and there is no way we can adequately address these events in this brief written synopsis. In response, we will be hosting a special Zoom webinar for our readers on February the 17th at 11am. Put a placeholder on your calendars, and we’ll send out more information shortly. Until then, here is the Readers Digest version of our observations and expectations.
COVID Turns the World Upside Down
The arrival of the most pernicious virus in decades sent the world into a tailspin in early February of 2020, when the CDC declared COVID-19 the most potentially threatening pandemic since the Spanish Flu in 1918. Global leaders took the unprecedented step of putting their respective economies into an induced coma – shutting down all types of businesses to hopefully blunt the curve and limit the damage. The economic carnage has been historic and is impossible to calculate at this point. Whether this strategy was effective in reducing the number of deaths we will leave to the historians to determine. But the world economy was effectively put into suspended animation – a remarkable experiment to live through and witness. Global GDP contracted worse than the Great Depression of 1929 – for a short time anyway. (More on that later.) Capital markets plunged around the world. In the US, the S&P 500 dropped more than 33% in a matter of weeks. Millions of jobs were lost, and hundreds of thousands of small businesses simply evaporated. Travel stopped. Airlines and cruise ships froze. Times Square was empty. Everything just stopped.
Then, something remarkable happened. First, Congress acted quickly to provide temporary financial relief to Americans and businesses through the CARES Act. And the Fed stepped up and flooded the markets with liquidity to stabilize asset prices. These two critical steps – absent in both the 2008 Financial Crisis and the 1929 Depression- effectively served as defibrillation paddles for the ailing US economy. Next, billions of dollars were allocated to vaccine R&D and Operation Warp Speed ensured that private industry had a critical stake in the solution. As we write, the fastest development of multiple vaccines in history is well on the way to containing further personal and economic damage, and the new US Presidential Administration has committed to inoculating 100 million Americans in the first 100 days.
Capital Markets React and Rebound
As global markets plunged in response to the pandemic, the talking heads in mainstream and social media poured gasoline on the fire. Travel and leisure stocks dropped 75%. Commodities and commercial real estate values were in a free fall. Energy companies and commodities plummeted. We won’t go into great detail here, but the vast majority of investors chose to stand fast. We fielded very few calls to pivot to more secure positions, as most investors realized that all viruses ultimately run their course and end. In hindsight, it turned out to be an excellent opportunity to put more cash to work. Asset managers did so, and investors who stood fast ended the year with nice profits. We will take this opportunity to remind investors of four important lessons we’ve all learned in 2020 yet again:
- The future short-term direction of things is fundamentally unknowable. Just like 2008, 2000, 1929, 1987, etc., the smartest people in the room couldn’t possibly predict market reactions to short term events.
- Owning the stocks and bonds of quality companies where management reacts and responds to market conditions to preserve and grow shareholder value has always weathered difficult and unpredictable circumstances.
- Historically speaking, 100% of the time markets have declined, they have rebounded to new highs. You cannot enjoy the advances if you do not weather the declines. The record is intact.
- Being diversified means you don’t make a killing, and you don’t get killed.
We will drill down on this topic more on our webinar on the 17th, but this message will not change: Patiently own a portfolio of high quality, diversified investments, and don’t let your emotions dictate your reactions to short term events.
An Acrimonious Election Circus
The opening quote in this commentary, while whimsical, is particularly suited for our times. Political polarization in the US is at an all-time high. Accusations of election fraud and politically motivated violence have dominated the news cycle. People are mad at each other – not because of who they are, but what they believe. It’s a sad time in our country’s history. Like our readers, we have our own personal views on the subject, but we won’t share them here. That’s not our job. When it comes to our duties and responsibilities to clients, we’re politically agnostic. As investment advisors and fiduciaries, we try to interpret political outcomes and their impact from an investment and tax perspective. Our mission is to minimize your taxes and maximize client wealth – regardless of how the political winds blow. We will address this in more detail in our upcoming webinar, but we would offer the following counsel to readers: If you’re pleased with the election outcomes, be graceful and conciliatory to your friends and neighbors who may feel differently. If you’re unhappy with the outcomes, be understanding and support a peaceful transition. This is the long game. We are a stronger country when we are united. Enough said.
2021 Economic and Market Outlook
You may be surprised to hear that despite the overhanging pandemic and political clouds, the economic picture for this year is actually quite encouraging. Corporate profits (the main driver of investment performance and returns) are on the rise coming out of the COVID Coma. As always happens, corporate management has assessed the challenges and opportunities and invested capital to grow their earnings for their shareholders despite the headwinds presented. The ongoing recovery from the COVID recession has resulted in a remarkable rebound in the financial health of America’s corporate infrastructure. Public companies are reflecting record levels of cash on their balance sheets and corporate profits are projected to grow 15% in 2021 – a pretty remarkable accomplishment given the narrative. In addition, personal household debt levels in the US are at record lows, and unemployment numbers continue to improve. Residential real estate demand (which typically leads us out of recessions) is robust. While we don’t necessarily expect equity markets to deliver a third consecutive year of double digit returns, the consensus estimates point toward another positive year in investment markets overall. (For those interested in more detail, we’ll delve deeper into this in our webinar)
In closing, it’s been a heck of a year. For more than three decades now, we’ve quoted the same phrase thousands of times, but at no time has it been more appropriate than now:
The world is always ending, but it just never ends.