Fourth Quarter 2020 - Pandemic + Unrest = Booming Stock Market?

Q4 2020 – Pandemic + Unrest = Booming Stock Market?

It is curious, somewhat perplexing and it just feels wrong.  Virtually every major asset class was up on the full year 2020, despite a deadly pandemic, a near instant recession, significant job loss, extreme business interruption, global isolationism, widespread racial unrest, one of the most contentious elections in history, riots at our Capital, and a major shift in political control of our government.  The US stock market recovered from the 35% market plunge early in the first half of the year, then marched on to new highs.  Bonds had a great year.  International stocks recovered strong and Emerging Market stocks outperformed in the fourth quarter, then continued it into January.  Gold advanced over 25% on the year.  Our portfolios ended up strong during a year that one would expect painful declines.  This should be a stark reminder that markets don’t measure human pain or happiness.  Markets are motivated by monetary profits and the incentives to seek those profits, regardless of how we are feeling.  

I started in this business twenty years ago and have been following markets closely for about twenty-five years.  I consider myself a youngster and I’m envious of the wisdom that the veterans of the business can impart from their historical experience.  I am grateful for the fact that I was drawn into the field during the roaring 1990’s and have experienced, on multiple occasions, historically extreme upside, as well as historically extreme downside.  You can’t help but learn something from those experiences, if you are introspective and curious. I also had the great fortune to be mentored, starting in college, by a wealthy individual investor who had a high emotional quotient, as well as intelligence quotient.  When we first met, he was 63 years old and had been a student of investments since age 16.  He was the beneficiary of trust assets that eliminated financial constraints yet couldn’t replace a father that had died young.  His intelligence and his financial means made his stories interesting, but his curiosity about the human condition and the influence of finance made those stories wise.  I am indebted to him for giving me a window into the humanity behind the textbooks that describe the 50 years before my 25 years of observation.  Aside from the history and technical knowledge, his most important contribution was to teach me to acknowledge my emotions, observe my visceral response, then endeavor to be objective.  He would say that you can’t ever be truly objective and detached in decision making.  However, if you stop to reflect on information and your emotional response, as a recent memory, you can observe them both more dispassionately before establishing an opinion.  It is a useful process, and in the aggregate, investors ultimately follow this same process to derive a price that they are willing to pay for an asset.  The quicker that we can be objective, the better we can react and behave.  

Political Strife

Divisiveness in politics is not new.  Perhaps the degree to which our divisiveness is so nearly 50/50 is new.  The degree to which our sources of news determine our interpretations of reality are most definitely new.  The degree to which we demonize and belittle opposing political views is relatively new.  I have personal political views that derive partially from the modern political platforms of both major parties.  I suspect that most of us can appreciate some bullet points from both party platforms, if we just ignore the characters that currently represent each party.  I am unaffiliated with a political party or any politically active organization because I want to remain as objective as possible in my investment decisions.  There are given candidates that represent a higher weighted average of my values and they get my support.  There are also times when I strongly favor a candidate and times that I strongly dislike a candidate.  The party that my favored candidates come from often changes from election to election.  However, maintaining objectivity in the face of increasingly aggressive reporting of “facts” makes this an exhausting exercise to keep up with all the spin.  It really shouldn’t be this hard.  Rules that required objective reporting and equal time for opposing views have been eliminated and are unlikely to ever come back.  Perhaps at some point, exhausted and hurt citizens will demand it, and the free market for viewers will provide it.  As of late, I am spending a good deal of my time with clients, separating political anxiety from investment decisions.  It was broadly accepted in 2016 that Trump’s lack of political experience and lack of connections with establishment people to run his government, would be unsettling for a stock market that prefers predictability.  Instead, stock markets continued the bull market recovery from the Great Recession lows and advanced to new highs.  Today, there is a widely accepted narrative that Biden and the Democratic controlled Congress will sweep in large tax hikes, regulations and wage increases that will cause markets to plummet.  However, the market continued a bull market trend through the election, through election lawsuits, through unrest at the Capital and through the inauguration.  Historically, there is no meaningful correlation between market returns and the party in power of any branch of government.  Politics certainly does have an impact on the economy, and ultimately on stock market returns.  The only problem is that there are so many other meaningful factors that the political factor gets drowned out and isn’t predictive.  It is natural to have strong political opinions.  It is common for those views to be deeply entrenched and unwavering.  However, it is not helpful to returns to let political anxiety infect investment decisions.  

The Virus

As of this writing, the US death count from COVID-19 has surpassed 410,000 and we are registering over 4,000 new deaths per day.  The CDC is now projecting that we will surpass 500,000 deaths before March 1st.  The US has a grossly disproportionate share of global infections and deaths, with our rate of infection only surpassed by five tiny developing countries, including Montenegro and Czech Republic!  It is natural to be fearful of the virus.  It is understandable to be resistant to the constraining remedies our scientists are recommending.  Both reactions elicit strong feelings of anxiety.  However, it is important to try and separate the pandemic related anxiety from financial decisions as well.  The pandemic is changing the way our economy works and the transition is painful.  However, our economy is adaptable and has been making the necessary changes to recover and grow.  The restrictions on daily life are having disastrous effects on certain industries, but there are steps that can help, like PPP loans and unemployment benefits.  None of these adjustments will be perfect for everyone.  But they can be helpful in getting us through a temporary emergency and there is indeed light at the end of the tunnel.  

We are pleased to have recovered from the March lows and to have a positive investment return in an otherwise awful year for humankind.  We are optimistic that the future will be brighter and that we can end this pandemic. We are mindful of balancing the financial risks in your portfolio, in light of all of the volatility and change in the world.  At present, we are rebalancing portfolios to trim our winners and we have shifted a little more of the portfolio toward Gold and Emerging Market investments, which tend to do well during periods of a weakening US dollar currency, resurgent growth in Asia and potential future inflation.  We are researching other commodity assets as potential new investments as well.  As always, please let us know if you want to review your financial plan or your portfolio.  We appreciate any information you can send us to help us update our records and stay abreast of your personal financial circumstances.  Stay safe, stay calm and endeavor to stay objective!

Cordially, 
 

Shane M. Alsworth, MBA, CFP®, CLU®, CIMA®

The views and opinions presented in this article are those of Shane Alsworth only

Investments are subject to market risks including the potential loss of principal invested. 

Asset Allocation does not assure or guarantee better performance and cannot eliminate the risk of investment losses. 

Sources: Morningstar/Ibbotson data, Ned Davis Research, BCA Research, Litman Gregory Research