Many investors easily forget certain years or vaguely remember an event or two, but 2020 will certainly be among those years investors won’t forget. From an investment standpoint, the S&P 500 has outperformed its historical average gaining 14.81% through the close of December 18. However, what makes 2020 unforgettable is the global pandemic that began at the beginning of the year which changed the way companies and individuals operate.
In the United States, the coronavirus or COVID-19 hit the markets in mid-February and caused the fastest ever bear market, which took place in only 33 days (23 market days). The markets declined almost 34% in that 33-day period which has been followed by one of the fastest rebounds which gained back almost 66% from the March 23 lows. Another twist to 2020 was the divergence between the stock market and the economy. In the chart below we can see that even though the stock market (burgundy line) is reaching new highs, U.S. GDP1 (grey line) has yet to recover to pre-COVID levels2.
As COVID case counts began to rise exponentially, governments sprang to action and enforced lockdown orders to curb the spread. These lockdown orders came with shutdowns of businesses and sent our economy into a downward spiral. Unemployment rates skyrocketed and the U.S. GDP saw a significant decline causing a recession.
Although our economy was heading for a recession, the markets, a forward-looking mechanism, were beginning to rebound with mega-cap companies leading the charge like Microsoft, Apple, Google, and Amazon, as well as tech companies such as Zoom, Advanced Micro Devices, and Nvidia.
The divergence between the economy and the stock market was largely due to the Federal Reserve and Congress which took significant actions to assist in stabilizing the markets. The Federal Reserve cut interest rates to near zero and introduced several programs that included Quantitative Easing (QE) and backing the loans of businesses to keep them afloat. Additionally, Congress unveiled a $2.2 trillion stimulus package giving relief to small business owners and direct payments to American households.
Lastly, there were three major cliffhangers the market and economy were attempting to deal with:
- Finding a vaccine
- Presidential election
- Additional stimulus
Health care companies were racing to find a vaccine and did so in an unprecedented amount of time with two vaccines approved by the FDA for emergency use and many more in clinical trials. The presidential election was creating uncertainty for business and the policy the next administration would set. The presidential election has ended with President-elect Joe Biden set to take the oath on Wednesday, January 20 once Congress approves the electoral college vote. The last cliffhanger to get resolved was another stimulus package, which was the subject of discussion in Congress for the last couple of months. Fortunately, on December 20, Congress officially passed a package worth $900 billion giving aid to small businesses, enhanced unemployment, and direct payments to households.
In closing, 2020 has seen many twists and turns. Amidst this uncertainty, the stock market has done what many thought it couldn’t do with a pandemic and economic shutdown. The volatility in the stock market adds to the case that investors should stay the course with their financial plans and long-term goals rather than try and time the market for short term moves.