2020 Year in Review

The year 2020 proved to be one of the most tumultuous in modern history, marked by a number of developments that were historically unprecedented. But the year also demonstrated the resilience of people, institutions, and financial markets.

Coronavirus was already in the news early in the year, and concerns grew as more countries began reporting their first cases of COVID-19. Infections multiplied around the world through February, and by early March, when the outbreak was labelled a pandemic, it was clear that the crisis would affect nearly every area of our lives. Governments and central banks worked to cushion the blow, providing financial support for individuals and businesses and adjusting lending rates.

On top of the health crisis, there was geopolitical instability (i.e. Brexit, China’s targeting of Australian imports) and widespread civil unrest in the US tied to policing and racial justice and a Presidential election which had the results disputed well into December. 2020 would end with both troubling and hopeful news: yet another spike in COVID-19 cases, along with the first deliveries of vaccines.

For investors, the year was characterized by sharp swings for stocks. March saw the US S&P 500 Index’s decline reach 33.79% from the previous high as the pandemic worsened. This was followed by a rally in April, and US stocks reached their previous highs by August.

Ultimately, despite a sequence of epic events and continued concerns over the pandemic, global stock market returns in 2020 were above their historical norm. Returns for key indices over the 12 months to 31 December 2020 are summarised below:

Equity markets generally had positive returns, with the tech heavy US Nasdaq index performing strongly.  Few would have anticipated these outcomes in April.

Fixed income markets mirrored the extremity of equity behaviour, with nearly unprecedented dispersion in returns during the first half of 2020. For example, in the first quarter, US corporate bonds underperformed US Treasuries by more than 11%, the largest quarterly underperformance in 50 years. This result demonstrated how risk adverse many investors were when the impact of the pandemic was emerging - many wanted to invest in the lowest risk assets. But the pendulum soon swung - the second quarter was the second-most positive one on record for corporates bonds outperforming Treasury bonds, with a 7.74% advantage. 

In US dollars. US credit represented by the Bloomberg Barclays US Credit Bond Index. US Treasuries represented by the Bloomberg Barclays US Treasury Bond Index. Bloomberg Barclays data provided by Bloomberg. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.

The Australian Government presented the federal budget in October rather than May to allow for the impact of Covid-19 to be better understood. While Australia’s net debt level blew out to attempt to restart the economy, the overall cost to service this debt (i.e. interest payments) is relatively low compared to previous levels of debt (see below):

Uncertainty remains about the pandemic and the broad impact of the new vaccines, continued lockdowns, and social distancing. But the events of 2020 provided investors with many lessons, affirming that following a disciplined and broadly diversified investment approach is a reliable way to pursue long-term investment goals.

Market Prices Quickly Reflect New Information about the Future 

The fluctuating market was a reminder of how quickly markets incorporate new information and changes in expectations. From its peak on February 19, 2020, the S&P 500 Index fell 33.79% in less than five weeks as the news headlines suggested more extreme outcomes from the pandemic. But the recovery would be swift as well. Market participants were watching for news that would provide insights into the pandemic and the economy, such as daily infection and mortality rates, effective therapeutic treatments, and the potential for vaccine development. As more information became available, the S&P 500 Index jumped 17.57% from its March 23 low in just three trading sessions, one of the fastest snapbacks on record. This period highlighted the vital role of data in setting market expectations and underscored how quickly prices adjust to new information.

One major theme of the year was the perceived disconnect between markets and the economy. How could the equity markets recover and reach new highs when the economic news remained so bleak? The market’s behaviour suggests investors were looking past the short-term impact of the pandemic to assess the expected rebound of business activity and an eventual return to more-normal conditions. Seen through that lens, the rebound in share prices reflected a market that is always looking ahead, incorporating both current news and expectations of the future into stock prices.  We wrote more on this in August: why-a-bouyant-stockmarket-now-makes-sense  

Owning the Winners and Losers

The 2020 economy and market also underscored the importance of staying broadly diversified across companies and industries. The downturn in stocks impacted some segments of the market more than others in ways that were consistent with the impact of the COVID-19 pandemic on certain types of businesses or industries. For example, airline, hospitality, and retail industries tended to suffer disproportionately with people around the world staying at home, whereas companies in communications, online shopping, and technology emerged as relative winners during the crisis. However, predicting at the beginning of 2020 exactly how this might play out would likely have proved challenging.

In the end, the economic turmoil inflicted great hardship on some firms while creating economic and social conditions for others. In any market, there will be winners and losers—and investors have historically been well served by owning a broad range of companies rather than trying to pick winners and losers.  It is more important to ensure you own the winners than it is to avoid the losers: the-perils-of-owning-individual-stocks-more-losers-than-winners

Sticking with Your Plan

Many news reports rightly emphasised the unprecedented nature of the health crisis, the emergency financial actions, and other extraordinary events during 2020. The year saw many “firsts”—and subsequent years will doubtless usher in many more. Yet 2020’s outcomes remind us that a consistent investment approach is a reliable path regardless of the market events we encounter. Investors who made moves by reacting to the moment may have missed opportunities.

In March, spooked investors fled the stock and bond markets, as US money-market funds experienced net flows for the month totalling $684 billion. Then, over the six-month period from April 1 to September 30, global equities and fixed income returned 29.54% and 3.16%, respectively. A move to cash in March may have been a costly decision for anxious investors.

A Welcome Turn of the Calendar

Moving into 2021, many questions remain about the pandemic, new vaccines, business activity, changes in how people work and socialise, and the direction of global markets. Yet 2020’s economic and market tumult demonstrated that markets continue to function and that people can adapt to difficult circumstances. The year’s positive equity and fixed income returns remind that, with a solid investment approach and a commitment to staying the course, investors can focus on building long-term wealth, even in challenging times.

Author - Rick Walker

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