Much ink has already been spilled on the woes of 2020 …. so what’s a little more! As always though, our focus is on your investments and of course the pandemic loomed large over the markets.
How remarkable was the 2020 stock market?
2020 featured the fastest bear market and then recovery ever. Also for the first time ever, the market recorded a gain for the year after being down more than 30% during the same year. On average, stocks gain about 65% in the first two years of a new bull market, with an average gain of 41% in the first year.
2020 demonstrated the benefits of diversifying your investments. For example, bonds, which gained during the “Covid crash” likely reduced your overall risk, offset losses from stocks, and offered you something to sell to buy stocks which were lower (a process known as rebalancing). Small company stocks, some value stocks, and emerging markets also came back strong towards the end of the year. Diversified portfolios with a broad mix of stocks and bonds generally saw positive results for 2020.
2021 trends positive, negative and mixed.
On the negative side, the fight against the virus is not over even though many positive developments such as treatments and vaccines helped buoy the market last year. If anything, I believe market sentiment is overconfident and too jubilant which would be a negative. However, valuations and sentiment alone are not great short term timing mechanisms for the markets.
But on a positive note, the recovery should continue with much pent-up demand, Americans are still spending and want to get out and do more. Areas like travel, leisure, entertainment, and restaurants could all see demand pick up as the virus is beaten back. And remember the strong gains typically seen early in a new bull market.
On the mixed front we have monetary and fiscal policy. The Fed is dovish, money supply is booming, and the accommodation is set to continue. But a weakening dollar and thus any inflation could weigh on consumers and markets, eventually pressuring the Fed.
Fiscally, with a new administration and new priorities, spending is likely set to increase for Covid relief and infrastructure which generally stimulates the economy. But on the flip side it could disappoint or lead to higher interest rates and a further weakening of the dollar.
As always, we will monitor these trends and your investments during the year. Contact us if you have any questions or need to review your situation and what it means to your investments. Thank you for your continued confidence and trust!
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. Past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss. The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States and controls the Federal Funds Rate (aka Fed Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy. Investors cannot invest directly in an index. Diversification does not guarantee a profit or protect against a loss.
Small cap stocks may be subject to a higher degree of risk than larger, more established companies’ securities, including higher risk of failure and higher volatility. The illiquidity of the small-cap market may adversely affect the value of these investments so those shares, when redeemed, may be worth more or less than their original cost. Value investments focus on stocks of income-producing companies whose price is low relative to one or more valuation factors, such as earnings or book value. Such investments are subject to risks that their intrinsic values may never be realized by the market, or such stock may turn out not to have been undervalued. Investors should carefully consider the additional risks involved in value investments. Emerging markets are sought by investors for the prospect of high returns, as they often experience faster economic growth as measured by GDP. Investments in emerging markets come with much greater risk due to political instability, domestic infrastructure problems, currency volatility and limited equity opportunities (many large companies may still be "state-run" or private). Also, local stock exchanges may not offer liquid markets for outside investors.