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Road and horizon

Q4 2020 PastCast: The fog lifts

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Here’s all you need to know. (If you’re in a rush.)

  • A historic Presidential election resulted in record turnout for each candidate, and ultimately a win for Joe Biden and Kamala Harris. Although contested, markets looked past the political rhetoric and rallied into the New Year, with major indexes closing 2020 near record highs. 
  • Stimulus talks continued into the 11th hour of 2020. After months of delay, Congress and the White House came to an agreement on a second economic relief package, including direct payments to individuals in the amount of $600 each, for those who qualify.
  • The FDA approved multiple coronavirus vaccines for emergency use. Distribution began, although progress has been slow nationwide. Meanwhile COVID-19 continued to wreak havoc on the US, with record numbers of daily deaths and hospitalizations.
  • By year’s end, US stocks had managed to rally nearly 70% from lows reached in the historic crash of March 2020. Patient long-term investors have perhaps never been rewarded more for their discipline in any other single year, than 2020.
  • Looking ahead, with Democrats now controlling both houses of Congress and the White House, markets seem to be counting on additional fiscal assistance. Relief is expected to come from another round of direct payments to individuals and state/local governments in early 2021. Optimism surrounding the prospect of a return to normal and a strong economic recovery, have taken hold of the stock market to kick off the new year.

And now for the long(er) version…

Good riddance! 2020 is now behind us, but even with the dense fog of political uncertainty lifting to close out the year, we’ve already seen just how much ugliness and polarization continues to reveal itself and challenge our nation’s founding principles. 

Despite all of this, the investing world is looking beyond recent events in D.C., and focusing on what appears to be the makings of a significant economic recovery. This is thanks to science, the resilience of the American spirit, and the prospect of trillions more in government spending, including additional relief to individuals and the possibility of a massive infrastructure bill. 

In the investing world, the fourth quarter of 2020 was defined by the US elections and approval of several promising COVID-19 vaccines around the world. Once the dust settled from several days of election uncertainty, US stocks managed a historic year-end rally to close out November and December. This was led mostly by small companies and value-oriented stocks, which had lagged behind the rest of the market for the majority of the year.

International and emerging market stocks have lagged behind the US in recent periods, but outperformed US stocks in 2020’s fourth quarter, thanks in large part to weakness in the US dollar.

Here is how major indexes ended what quickly became one of the most hated years in human history:

(January 3rd – December 31st)

Dow Jones Industrial Average: +7.3%

S&P 500 Index: +16.3%

Nasdaq: +43.6%

And here is where those three indexes were in March (lows of the market crash)…

(January 3rd – March 23rd)

Dow Jones Industrial Average: -24%

S&P 500 Index: -30%

Nasdaq: -14%

We’ve covered the record economic collapse and spike in unemployment in prior PastCasts, so no need to rehash that here. But it is still somewhat astonishing to consider how one of the worst economic and public health disasters in our history seemed to act as a catalyst for one of the most impressive stock market recoveries and one of the best overall years for stocks EVER. Makes perfect sense, right?

 

Key 2020 takeaways for investors

Investing is emotional

Let’s face it – as human beings, we simply aren’t equipped to be successful investors. Our brains tell us to run away from stocks at nearly every moment in history that has proven to be a buying opportunity. No one truly feels good about investing MORE or holding onto their stocks when the sky is falling around them, even if they’ve read every book (or blooom blog post!) on investing. 

Money can toy with our emotions unlike anything else in our lives, but only if we allow it to. In a year when millions of lives and livelihoods were lost around the world, the human instincts of fear and greed around money managed to both drive markets deep into an abyss AND send them on an optimism-fueled, forward-looking rocketship skyward. 

Unfortunately, we know that wild swings in the market tend to victimize the average investor. By relying heavily on the market for their retirement savings, it distracts them from long-term goals, and steers them off the path of their long-term strategy.

Don’t let emotions drive investment decisions or cloud your long-term focus. We’re here to help you with that!

 

Markets aren’t predictable

After last year, this is an easy and obvious one for most. If a fortune teller told you in January 2020 that we were about to go through one of the worst global economic disasters, caused by a Pandemic, my guess is you wouldn’t have expected stocks to have a year of returns well into the double-digits, ending the year at or near all-time highs. But here we are…

Most business media pundits, market analysts, and politicians were made to look like fools over and over again for their short-term forecasts through 2020. Nothing seemed to play out the way anyone expected in the first quarter, let alone the entirety of 2020. 

And yet, an entire new generation of investors became extremely active in 2020. (And they seem to have had some success doing it, depending on who you ask.) But while short-term bets on individual stocks during a period of largely unprecedented market momentum may have felt like easy money, trading is NOT investing. Trading individual stocks can teach some very powerful lessons about the markets and investing, just not the kind you want to learn by experience (especially in an account meant for retirement).

There is no crystal ball. While 2020 was an outlier by so many measures, nothing about the unpredictability of the stock market last year was entirely unique. No matter what is going on in the world at any given time, markets simply cannot be predicted. 

So what’s our advice? Determine your goals. Implement an appropriate long-term strategy. Let your advisor help you stay on track. And tune out the noise. Your future self will thank you.

 

Your investments (and the market) don’t care about your personal politics

We all have deeply held beliefs that frame our own biases and views on the world. Your 401k couldn’t care less about any of that and neither does the S&P 500. Yet, every time the next election rolls around, investors vote early and often by way of their retirement accounts. This is perhaps one of the greatest sins of investing, but it’s a lesson far too many end up learning the hard way. EVERY. TIME. 

2020 was no exception.

Leading up to the election, articles flooded social media and politicians made their cases for how one candidate or the other would either take your 401k and the market to new highs or, in some instances, all the way to zero. That’s not how this works.

We all know that this rhetoric is ridiculous, but we don’t necessarily know that everybody else knows. Therefore, our gut often tells us to “just get out of the market until the dust settles, then you’ll get back in…you know, just to be safe.” 

Regardless of who your candidate was, fear of them losing may have led to more fear of what that may do to the stock market and your retirement accounts, especially in the short-term. We wrote an article last summer that dives deeper into this. Check it out here for some eye-opening perspective on politics and investing.

Unfortunately, we know far too many that let fear get the best of them (but hopefully not you!). Making significant changes to their investments leading up to the election made them miss out on the massive rally that followed.

The stock market does not have a preferred political party. What the stock market fears far more than either candidate, party, or policy, is uncertainty. While arguments can be made that pieces of the policy agenda of the incoming administration could be detrimental to stocks, there are an equal number of cases to be made on the other side of that argument. And so far it seems that those are what the market is focused on in 2021.

 

Onward…

Our team of advisors had the opportunity to have thousands of meaningful conversations with our clients in 2020. Our hope is that having us on your side to guide you through these difficult times and keep you focused on your long-term financial goals gave you the confidence you need to prioritize what truly matters most in your life. 

2020 is a hard year to put into words, but we want to close with a heartfelt thank you to every one of our clients that has stuck with us and trusted us through one of the most chaotic years of our lifetime. 

Blooom was created with the mission of providing simple, trustworthy, and affordable advice to those without access to a traditional advisor. And our hope is that we are able to continue to be your trusted ally in your financial journey, throughout all the ups and downs to come.

Happy 2021 from all of us at blooom!

Published on January 14, 2021