Year End 2020 Commentary

January 14, 2021

No matter how you look at 2020, it was a remarkable year!

As high as my hopes for 2021 may have been, two weeks of ice to start the month, among other things, have at least somewhat dampened my enthusiasm for the new year.

A lot will be said about 2020, but sticking to an investment review, it was actually an incredibly good year. Without paying attention to the disconcerting details, both fixed income and equity investors should be very pleased.

The stock market indexes ended the year at record highs. For the year, the S&P 500 had an excellent total return of 18.4%, while the Russell 3000 Growth Index turned in a stunning 38% total return. Even the MSCI World Index’s total return approached 16%. Given the debacle earlier in the year, these returns are even more remarkable. I’m not sure I can fully explain all of this, but the fiscal and monetary actions that were put in place to deal with the pandemic were major contributors to the US stock market’s performance. For international stocks, currency changes would have to be a significant factor as well.

Fixed income investors should also be quite pleased. The 2020 total return for the Bloomberg Barclays US Aggregate Bond Index was 7.5%, and for their US 5-10 Year Government/Credit Bond Index, it was even better at 9.7%. Of course, looking forward this needs to be tempered by the recognition that these returns were the result of the pandemic induced collapse of interest rates.

The market’s very strong finish to 2020 is based on the expectation of a quick recovery from the economic impacts of the pandemic during 2021.

Of course, the real question is what will 2021 bring for investors? The best answer I can reasonably give is – I don’t know. But why stop there? Here are some of my general thoughts.

  • It seems likely that an effective vaccination program will be in place soon.
  • Federal Reserve policy is likely to be accommodative until employment and inflation force it to change course.
  • Interest Rates are low and are going to be low for some time – maybe years rather than months.
    • Monitoring the shape of the yield curve may be a good idea.
  • Equity values have become much more volatile in the last few years.
    • This roller coaster ride will likely continue for some time.
    • At the very least prices are ahead of earnings! Earnings will improve, but will it be enough to sustain current price levels.
    • Historic risk measures will continue to suggest higher levels of potential volatility than we saw during the last decade.
  • Fixed income assets will still help stabilize an investment portfolio’s value.
    • But with the current low interest rate environment, bonds will not provide much current income and may have periods of negative total investment returns.
  • Ignoring potential inflationary impacts may be problematic.
    • With current inflation rates of under 2% and interest rates under 1%, purchasing power will steadily decline over time.
    • There is also the possibility that inflation accelerates, fueled by the current monetary and fiscal stimulus. Whether this is a real concern or not, I’ve suggested it as a possibility for some time. Why stop now. [Stopped clocks are right twice a day, and calendars repeat at most every 28 years.]

So, what to do? I listened to a speaker for my continuing education requirements earlier today who basically laid out the same case about the coming year in his response.

  • Short term predictions are awfully hard.
  • Long term forecasts aren’t easy, but more likely to hold up.
  • Therefore, following an investment plan you’re comfortable with and sticking with it, is probably the better course.

I know from the allocation models I built 20 years ago there are times when it seems like making a change is the only thing to do. I have made changes in the underlying investments, but the basic asset allocations have not changed. Since I’ve been following the same four allocation models it still surprises me when I see how similar the returns are over time.

So, is this time different? Maybe. But historically, the answer has generally been no. Find an asset allocation you’re comfortable with. Be slow to make changes, unless they are based on changes in your circumstances – not the markets.

Finally, I would be remiss to not mention the political environment. Clearly this is a significant moment for our democratic republic. However, I – maybe naively – believe the country will work through this and move forward

Here’s hoping for a successful and a little calmer 2021!