The experience of investing often feels much like a roller coaster ride. With both, you get the feeling of flying up peaks and plunging into valleys.
With amusement park rides, however, we can usually judge whether or not a particular coaster is something we can handle before we get in line. Investors, on the other hand, often struggle to choose an investment strategy and portfolio allocation that suits their tolerance for thrills, twists, and turns.
As a result, many investors end up with a mismatch in their ability to handle risk and what kind of ride their portfolio takes them on. Those that make it through to the end of the ride aren’t necessarily better at choosing between specific investments. Instead, it’s more likely that they were simply better at choosing a portfolio that matched their comfort with risk and volatility.
I always feel the roller coaster analogy is a good one for describing the investment experience, but 2020 highlighted that even more so than most years do. We saw significant disruption of daily life, pain and suffering on many fronts, and massive change forced at almost every level — from the individual to societal, and from private businesses to public institutions.
Here’s a closer look back at the year no one saw coming, and the lessons that investors can gleam from such a topsy-turvy twelve months.
Heading Up the Lift Hill of 2020
At the beginning of 2020, it seemed that the stock market would continue its upward trajectory into the new year. The market marched higher through January 2020 and hit a new high on February 19th. Unemployment sat at a 50-year low and the economic backdrop looked solid.
If the market really was a roller coaster, then this was the climb up the lift hill. The first drop was the COVID-19 pandemic, officially declared as such in mid-February. That pushed both the market and the economy itself over the hill to plunge into a steep decline. By March, the S&P 500 registered stunning losses of 34%, setting a record for the fastest-developing bear market in history.
How the Economy Reacted to the Blow
As the pandemic dragged the global economy down in the spring, the massive, coordinated response of monetary and fiscal stimulus put a halt to the market’s precipitous decline. Congress passed the $2.2 trillion CARES Act in late March, bringing financial relief to consumers, businesses, and state and local governments.
It was the largest fiscal stimulus package in the country’s history, representing more than 10% of annual U.S. GDP. The Federal Reserve also dropped their key interest rate to 0%, reintroduced bond buying programs, and opened new credit facilities to support the economy.
The stock market began to find its footing in April. The economy, however, continued its free fall as unemployment soared to 14.7%, its highest level since the Great Depression. The forced economic shutdown put GDP on its own roller coaster that seemed divorced from financial markets.
Even as stock prices stabilized and started to look less apocalyptic, the economy suffered the worst quarterly decline on record in the second quarter, declining 31%. Although things looked grim, GDP came roaring back in record fashion with the subsequent economic reopening. The economy notched its highest quarterly growth in history in the third quarter, with GDP gaining 33%.
Markets Take Us on the Most Extreme Ride Yet
Interest rates weren’t exempt from a whiplash-inducing drop and rebound. Investors flocked to the safety of bonds in March as stocks plummeted in value. Meanwhile, the Fed cut interest rates in an effort to support the flailing economy. 10-year treasury bonds began the year yielding 1.80%, but as a result of the pandemic and the response to it, fell to a historically low yield of 0.32% in early March as the Fed cut rates and fearful investors piled out of stocks and into bonds.
Still, it wasn’t all bad news in the market. The S&P 500 regained all of its losses for the year by late summer. It was the fastest return from a bear market we’ve ever seen. Historically, the market needed 6 years to hit new highs after downturns on the magnitude we saw in March.1 But this time? The market needed just 126 trading days before setting new record highs in August.
The S&P 500 closed out the year in stunning fashion, posting an annual gain of 16% despite being forced to navigate the challenges of rising COVID cases and one of the most polarizing presidential elections in history.
Lessons from 2020’s Thrill Rides
The chaos and unpredictability of 2020 set innumerable economic and stock market records. But it also reinforced some time-tested investing principles that are worth remembering:
The year 2020 sent investors on a wild roller coaster ride. We were all forced to navigate a new normal in the middle of a global pandemic with twists and turns that covered a range of struggles and unfortunate events.
As investors turn the page on 2020 and focus their attention towards 2021, most feel optimistic about the distribution of the COVID vaccine and with it, the potential to return to normal life. Even as we look to happier times ahead, here’s hoping investors won’t forget the invaluable lessons that such an unpredictable year provided us.
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