2020 was a crazy year for investment markets. Covid was the first worldwide pandemic since the Spanish Flu over 100 years before. Markets were slow to react to the initial news about Covid, but once it became apparent that it would become a worldwide pandemic, markets reacted violently in late February and most of March. In approximately one month, US stocks fell 34% as measured by the S&P 500 Index. The Fed stepped in with unprecedented liquidity in late March. The Federal government then reacted with uncharacteristic speed and passed the CARES act in late March. Within 5 months, the US markets had completely recovered their losses, and ended up over 16% for the year (S&P 500 index). Not many anticipated the market recovery, especially with the Covid pandemic still in full swing and before any vaccines or effective treatments were available.
It’s always healthy to look back at a crisis to understand the investing lessons. Here are some of the things I learned:
1. Investment markets bottom when unemployment peaks. In the Great Financial Crisis in 2008, markets did not hit their bottom until March 2009, when unemployment was highest. It was a long downturn. The Covid pandemic was more of a natural disaster. Unemployment skyrocketed immediately. Once the Fed stepped in with monetary support, and the Federal government provided fiscal support and various programs directed at maintaining employment, the market bottomed. This happened much faster than in 2008.
2. What is obvious to you and me is not always how the investment market will react. In mid-2020, it was obvious that the recovery from Covid would take a long time and the real economy was in bad shape. Investment markets look out 6-9 months, and anticipate things like vaccines.
3. It is difficult to time the market to take advantage of market declines. The best that most investors can do is have a target asset allocation and rebalance when it is outside of the target.
4. Trends can continue a lot longer than what seems rationale. Pandemic winners like Zoom were obvious by the end of April, 2020. As such, many would expect that there was not so much upside left in the stocks. However, Zoom quadrupled between the end of April and its peak in October. It has since given back some of its gains, but it is still more than 2x its value at the end of April 2020
5. There are no “safe” investments with high returns, especially in the era of zero interest rates. Before 2020, there were investments, like non-agency security funds, that had provided stock market like returns with very low volatility. This all changed in the Covid crisis when liquidity in that sector disappeared. Losses for some of these funds were over 50%. Most of these funds still have not recovered to their pre-Covid prices.
6. Every time is different but maybe not so different. While the cause of each market downturn is different, the end result that markets eventually recover and exceed their prior peak is no different. The important thing for investors is to have an investment allocation that they can stick with.
7. The news media exists for ratings and to sell advertisements. Their goal is to spread FUD – fear, uncertainty, and doubt. This draws in more viewers. Don’t believe everything they say. Better yet, limit your news watching time.
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