For anyone who has ridden a rollercoaster, you understand both the thrills and stomach-churning feelings that come with the experience. For investors, these were likely similar feelings you had throughout the year as well. Consider this: in 2020, we had the fastest bear market in history followed by the fastest recovery, all brought on by the Coronavirus, impacting global businesses, large and small.
Through it all, there were some important lessons to take away from the events of 2020.
Picking winners consistently is hard: Consider that the small cap-oriented Russell 2000 Growth led all equity benchmarks in December with a 9.3% return. However, it was the Russell 2000 Value benchmark which had the highest return for the 4th quarter (33.4%). And yet the Russell 1000 Growth posted the best return for the year at 38.5%.
It is really difficult to time the markets and move to cash: Throughout the years we have likely shown you charts indicating how different (i.e. lower) returns are for investors that miss the best market days because they don’t stay invested. 2020 brought us another great example. If you think back to the end of March 2020 when the Russell 1000 was down over 20% YTD and the Russell 2000 had fallen by more than 30% YTD, would you have believed back then that their respective returns would end up being positive for the year? Investors that went to cash in March/April likely missed out on the extraordinary rebound.
The market is not the economy: Even with higher unemployment levels and economic challenges due to Covid-19, the major indexes (e.g. Dow, S&P 500, Nasdaq) each hit new highs in 2020 and finished well above where they started the year (see Exhibit 1 for more details). Remember, markets make estimates about what the future is expected to look like, not necessarily what the present is.
Source: St. Louis FRED
Do not believe the hype: Wall Street is full of people making forecasts. While the people making these prognostications are well-intentioned with very well-thought-out arguments supporting their views, the reality is it is incredibly difficult to get forecasts consistently correct regarding the economy and markets. Do you remember people predicting in December 2019 that the coronavirus was going to cause a global shutdown and that we would all be scouring store shelves for toilet paper?
To read more of the commentary on 2020 markets, download the full PDF here.