Once in a very great while, there comes a year in the economy and the markets that serve as a tutorial in the principles of successful long-term, goal-focused investing. 2020 was such a year.
On December 31, 2019, the Standard & Poor’s 500-Stock index closed at 3,230.78. This past New Year’s Eve, it closed at 3,756.07. With reinvested dividends, the total return of the S&P 500 was about 18%.
The equity market had, in 2020, quite a good year. What should be so phenomenally instructive to the long-term investor is how it got there.
From a new all-time high on February 19, the market reacted to the onset of the greatest public health crisis in a century by going down roughly a third in five weeks. The Federal Reserve and Congress responded with massive intervention, the economy learned to work around the lockdowns—and the result was that the S&P 500 regained its February high by mid-August.
The lifetime lesson here: At their most dramatic turning points, the economy can’t be forecast, and the market cannot be timed.
This is not meant to dismiss any fears or concerns you may have had last year. Being fearful in the face of a global pandemic and a shutting down of a global economy is quite normal.
Two lessons are worth noting in this regard:
- The velocity and upward trajectory of the equity market recovery essentially mirrored the violence of the February/March decline.
- The market went into new high ground in midsummer, even as the pandemic and its economic devastations were still raging. Both outcomes were consistent with historical norms. “Waiting for the pullback” once a market recovery gets under way, and/or waiting for the economic picture to clear before investing, turned out to be formulas for significant underperformance, as is often the case.
The American economy – and its leading technology companies – continued to demonstrate their fundamental resilience through the balance of the year, such that all three major stock indexes made multiple new highs. Even cash dividends appear on track to exceed those paid in 2019, which was the previous record year.
Meanwhile, several vaccines were developed and approved in record time, and were going into distribution as the year ended. The hope is the most vulnerable segments of the population could get the vaccines by spring, and that everyone who wants to be vaccinated can do so by the end of the year, if not sooner.
The second great lifetime lesson of this hugely educational year had to do with the presidential election cycle. To say that it was the most hyper-partisan in living memory wouldn’t adequately express it.
In this event, everyone who exited the market in anticipation of the election sacrificed investment returns. The enduring historical lesson: never get your politics mixed up with your investment policy.
As we look ahead to 2021, there remains far more than enough uncertainty to go around. Is it possible that the economic recovery – and that of corporate earnings – have been largely discounted in soaring stock prices, particularly those of the largest growth companies?
Yes, of course it’s possible. Now, how do you and I – as long-term, goal-focused investors – make investment policy out of that possibility? My answer: we don’t, because one can’t. Our strategy, as 2021 dawns, is entirely driven by the same steadfast principles as it was a year ago and will be a year from now: buy quality and diversify. (credit: Odette Morin & Terry Broaders)
We have been assured by the Federal Reserve that it is prepared to hold interest rates near current levels until such time as the economy is functioning at something close to full capacity – perhaps as long as two or three more years.
For investors like us, this makes it difficult to see how we can pursue our long-term goals with fixed income investments. Equities, with their potential for long-term growth of capital – and especially their long-term growth of dividends – seem to us the more rational approach. We therefore tune out “volatility.” We act; we do not react. This was the most effective investment approach in 2020. I believe it always will be.
I look forward to discussing this further with you in our annual review session. Until then, let me thank you again for being my clients. It is a privilege to serve you.