It would be hard to imagine a stranger year in the U.S. investment markets than the one just passed, or a year that did a better job of defying logic. After the dramatic market collapse that began on February 20, and saw a 13% drop in the month of March, the U.S. investment world recovered nicely and sailed through a steep recession, record unemployment and three waves of a pandemic. The second-quarter saw a 32.9% annualized decline in the U.S. GDP, but by the time those statistics had been gathered, the U.S. indices were reaching new records. By the end of the year, the S&P 500 index* had gained more than 18% in a year of steep job losses and widespread pain, achieving record highs as the markets closed on December 31.
2020 also illustrated the folly of trying to predict the future. At the beginning of the year, who could have forecast that a massive global pandemic would engulf every aspect of our lives, or that it would have such a huge impact in the US and the world?
A breakdown shows that just about every investment asset was up strongly for the second year in a row. In addition to the 18%+ growth in large cap US stocks, developed international stock gained almost 8% for the year. Emerging market stocks were up more than 18% in 2020. In the bond markets, we we saw positive returns for 1st quarter during an extremely volatile period for stocks, and they ended the year up 7.51%.*
With all the consistently grim economic news (the economy hit recession territory in the first quarter of the year and the second quarter was the worst GDP performance on record) it's hard to remember that, if you ignore the brief glitch, we are continuing a long bull market that started back in March of 2009. This is a remarkable run. Bear markets tend to occur about every 3.5 years, and the previous record was 9.5 years from November 1990 to March of 2000. To say that our current investing good fortune is an anomaly risks significant understatement.
At the same time, few would argue that stocks are cheap right now. By one measure, the Price/Earnings ratio of the S&P 500 index is 33.83, which is about 72% above the modern-era market average of 19.6. With interest rates and bond yields at rock bottom, some professional investors have decided that stocks are the only way to make money in their investment portfolios. But the current valuations suggest that we be cautious about expecting high returns for much longer. Most people realize that the underlying economic fundamentals are shaky at best; the unemployment rate of 6.7% feels like an undercount since millions of service workers in the restaurant industry are sitting at home, and 787,000 Americans filed for unemployment last month. Nobody yet knows the damage that the pandemic is causing America's public companies as they limp along with remote workforces, and we may not know the full extent until the middle of next year--if then. So a diversified portfolio matched to your goals and comfort level remains the best protection in a world of unknowns.
Nobody can predict when or how the bull market will end, how deep the inevitable (sooner or later) bear market will be, or, really, anything other than the fact that all past downturns were followed by upturns which took the markets and the economy to new heights. We've already seen that dynamic in microcosm during the 2020 year of surprises.
Portions of the investment review adapted with permission of Financial Columnist Bob Veres.
*Source for investment returns is Morningstar as of December 31, 2020. S&P 500 TR USD for the S&P 500. MSCI EAFE NR USD for developed international markets. MSCI EM NR USD for emerging markets stock. Barclays US Agg Bond TD USD for the US aggregate bond index.