2020 Financial Year in Review
Welcome to 2021! I’m glad all of you are with me today, and I hope you’re all staying healthy and safe. Today, I’m going to look at 2020 and what’s to come in 2021.
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2020 Financial Year in Review
I’m writing this on January 4, 2021, and reflecting on 2020. Some pretty amazing things happened in 2020.
Housing Market on the Rise
First of all, we had home prices increase by 8.4% in 2020. That’s the fastest increase that we’ve seen in home prices since 2014.
Ups and Downs
We also saw the fastest peak to trough drop in the market ever; three times as fast as the 1987 peak to trough drop. In the stock market in just 33 days, starting on February 19, 2020, the stock market lost an astonishing 34%. Now, as you all know, the market’s recovered nicely.
Now is one of those times when you have to step back and understand that the market is more of a leading indicator than waiting for the economy to recover and the market to follow. Typically, the market leads us out of the recession. Not that the market physically leads us out of the recession. But as we start to see the market recover, that gives us an indication that the economy should begin to recover.
Unemployment Falls and New Administration Elected
We did end the year with unemployment back down at a low number, just above 6%. And we have a new administration coming in here in January. Many things are going to weigh on the market as we move forward. We’re going to talk about all those, but before we get to, “What do we think about 2021?” Let’s talk a little bit about the recovery in the market in 2020.
2020 Market Recovery
I want to talk to you about where it came from, what we think is ahead today. I want to talk about where stock prices are, or the valuations of the major indices, and where they are right now from a historical perspective. So let’s get started here with a little bit of what’s going on in the markets.
December 2020 Market Returns
Figure 1 | Source: Chaikin Analytics
All right, we’re going to start with a one-month timeframe sorted by returns. So what we’re looking at in Figure 1, you can see I’ve got everything from Russell 2000, all the way down to the Dow Jones Industrial Average. Talk about a Santa Claus rally across the board. We had some phenomenal returns in December.
The Russell 2000 was the best index for December, up 8.31%, followed by the S&P 600, S&P 400 Mid Cap, and the Small Cap 600. At the very bottom is the S&P 500 up by 3.26%, and the Dow Jones Industrial Average up by 3.09%.
2020 Market Returns Last Three Months
Figure 2 | Source: Chaikin Analytics
If I expand this out over three months, in Figure 2, look at what happens here. In the last three months, the Russell 2000, up by nearly 31%, the S&P 600 Small Cap, up by almost 31%. The S&P 500, up by 11.64%. Dow Jones Industrial Average is up by 10.19%. I also threw the QQQ in here, which is the NASDAQ 100, up by about 13% over the last three months.
2020 Market Returns Last Six Months
Figure 3 | Source: Chaikin Analytics
I’m going to back this up again to a six-month timeframe in Figure 3. Over the last six months, you still see the Russell 2000 and the small caps leading the way. And if you looked at this, and you’ll look just at the last six months, you’d think, “My goodness, the Small Caps were the place to be in 2020.” But not so fast.
Figure 4 | Source: Chaikin Analytics
If you back it up to year-to-date, in Figure 4, check this out. From a year-to-date perspective, look what’s down here at the bottom. S&P 600 small Cap, Russell 2000 wound up here in the middle.
Let’s think about this. Over six months, the Russell 2000 and the Small Cap was up 37% and 35%, respectively, yet year-to-date they wound up, Small Cap, up only 9.79%, and Russell 2000 up 18.34%. That means all gains in these indices for the year came in the last quarter of the year.
2020 Fourth Quarter Skepticism
Now, many people were very skeptical about the fourth quarter of this year. Of course, we had a very contentious election. There was a lot of drama over COVID-19 and the pandemic, and rightly so in both cases. So, many people were nervous. Well, what happened in the fourth quarter? We had a Biden victory, and then we had a vaccine. Not just one vaccine, but multiple vaccines for COVID-19.
Vaccine Rollout and Market Sentiment
Now, the rollout of the vaccine has not been as fast as anybody had hoped. However, when we look at what the market is doing today, I believe the majority of why the market is moving ahead, as fast as it is, has to do more with the vaccine than it does with anything in our political landscape.
The Consumer is King, and the Markets Know It
I’ve said this for the last two months, and I’m going to continue to repeat this because it’s the truth. The truth is that you and I, the consumer in the United States, we hold the power to fuel this economy. It’s what we do every day. It’s how we live and what we spend that drives our economy. 70% of our gross domestic product, our GDP, is consumer spending.
Then about 15% is corporate spending, and another 15% is government spending. So the markets have taken off as fast as they have because there is hope that this vaccine will allow the consumer to get back to normal life. To get out and travel, go out to eat, and go shopping.
So many of you that I’ve talked to throughout the year have said, “Gosh, I just can’t wait to get back out.” There is a lot of pent up demand out there.
More Housing Info
I mentioned earlier that home prices up 8.4% for the year, but check this one out. Home sales were up 16% in 2020. In the greater Kansas city area, most homes for sale are selling within weeks, if not days. And many of them at higher than the asking price.
The Fed and Interest Rates
A lot of that is fueled by what I’ll call our “best friend” right now, the Fed. Think about interest rates and where they are today. That’ll give you a lot of the story of why home prices are moving up and why home sales are up, but that’s only part of the equation.
Millennial Boom
The other part of the equation is the millennial generation starting to form families and buy homes. I think that that phenomenon is going to continue. Keep in mind that the millennial generation is now by population, the largest generation in the United States today. As that generation continues their family formation years, we’ll see that part of our demographic continue to fuel the economy.
Reassess Your Risk
So as we look into 2021, a couple of things to note, if you had a 60/40 stock to bond mix on January 1, 2020, chances are today that you have far more in stocks than 60%. That’s because of what the markets did. You need to go back and reassess where you are from a risk perspective. Right now, here on January 4, 2021, the markets, on average, are at about a 42% premium to what is their normal price to earnings ratio.
Now, that in and of itself is not scary if the vaccine works well, and the consumer gets back out and starts to live their normal life. However, I think we’re going to see more volatility and a market pullback if we wind up with another strain, the vaccines prove ineffective, and we can’t get a grip on this COVID. And if we have Fauci and Biden saying, “We’ve got to shut down the economy again.” However, the markets right now are optimistic that the vaccines are going to work.
Federal Reserve and Government Support
We also have to keep in mind, remember I said, the Fed was our best friend. As we think about what the Federal Reserve did in 2020, they provided liquidity. They were the buyer of last resort for the bond market and flooding the economy with liquidity.
We had different stimulus packages, and I believe that we’ll see another stimulus package, where the fight over the $2,000 stimulus check turned into a $600 stimulus check because the Senate and the House can’t get along. Neither can agree on where money should go or how it should be tied to different things that they want to put in. That’s a whole other conversation altogether, not for this particular video.
But when we think about that, we’ve got a Fed and a government willing to support the economy, ready to keep it out of a negative situation or a recessionary situation. So, with the support of the Fed, that should give the market what it needs. That doesn’t mean it’s going to be a straight line. And it doesn’t mean we’re going to see a first quarter resemble of the fourth quarter. That would be kind of unprecedented.
Looking to 2021
“Don’t forget. We invest so that you can live your one best financial life. We can’t look at this from the standpoint of greed.” – Dean Barber
I expect that we’re going to see things in a choppy trade here early on in the year. There’s a lot to be said about what’s going to happen with the new administration. Will there be immediate tax increases? Will there be additional regulations put on businesses and small businesses that could hamper growth? We don’t know any of these things. It’s going to be an interesting year as 2021 unfolds.
My prediction is if, in fact, the vaccines are effective, we will see positive results in the equity markets for 2021. It won’t be a straight line. I don’t expect anything like what we saw in 2020. But of course, nobody expected 2020 to do what it did. Nobody expected the vaccine. Nobody expected as fast of a recovery in the stock market as what we saw. So as everybody knows, you can’t try to guess what the markets are going to do.
Control What You Can Control
What we can do is always step back. We can take a very pragmatic and educated view of everything that’s happening and do our best to try to make sure that you’re in the position you need. Don’t forget. We invest so that you can live your one best financial life. We can’t look at this from the standpoint of greed. You have to look at it and make sure that your money is doing for you, what it’s supposed to be doing.
I encourage you to always keep the dialogue open with your financial advisors here at Modern Wealth Management. Let’s get your plan updated and make sure that we’re heading into 2021 with our eyes wide open. Like I said earlier, maybe we want to take a look at rebalancing.
Maybe we want to take a look at your risk profile? Or we may want to look at your winnings from 2020 and take some of those off the table. Possibly set aside a year or so of income from some of the gains. All things are possible, but it requires great communication between you and us. If you’re a client, reach out to us by clicking here.
If you aren’t a client and are interested in speaking with us, we offer a complimentary consultation, which you can schedule below. Choose the office you would like to meet with, and we can meet via virtual meeting, in-person, or phone.
Here’s to 2021
Here’s to hoping that 2020 never repeats itself. I do hope that everyone had a very excellent holiday season and here’s to a great 2021. I’ll be talking to you in about a month.
Dean Barber Founder & CEO
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.