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2020 Market Review

Markus Muhs - Jan 11, 2021
Time for another annual review of the markets.
Instead of boring you with yet another “year in review” or prognostication of what the markets might do this year (there sure are a lot of ‘em this time of year!) I actually want to aggregate here some of the really good bits of information I've read and curated from the many other market reviews out there.
When asked for his market prediction, J. Pierpont Morgan responded “it will fluctuate…” That’s about as good of a prediction anybody could have offered last year! 
To be fair, volatility in the markets in 2020 was of a truly historically epic scale. Of the 5 worst days in the history of the Dow Jones Industrial Average, 2 of them were the 1929 crash, 1 of them was Black Friday in 1987, and the other 2 happened in March 2020. March 16th’s -12.93% ranks second only to Black Friday. The first big down day on March 9th, at -7.79% was the biggest down day we’d seen since 2008 and it was only the third worst day in March (13th overall historically). 
We also saw, during 2020, the fastest ever decline from an all time high AND the fastest ever recovery to new all time highs. At the end of the year, if the markets didn’t do any of that and just looked like the graph below, you might be in the exact same position today, just way less stressed out.
In the future, people looking back at market history will simply mark 2020 down in the "positive years" pile, without much more of a thought as to what happened in 2020. Historically, around two thirds of calendar years were positive for stocks, making 2020 even less statistically relevant than 2018 was, in which the -4% that it finished the year off at also didn't tell the whole story.
In my “Decade in Review” that I wrote a year ago, I didn’t make any predictions for the markets in 2020, and who could have? If I would have predicted anything, it might have been that technology stocks and large-cap growth, in general, were due for a correction and that maybe small-cap value stocks would lead again, but we saw how that went…
I did mention that market timing is a fool’s errand, and now we have 3 calendar years backing this up. 2018 was the last year we had strong growth in corporate earnings, and in that year the markets went down. 2019 corporate earnings were flat and the markets finished strongly. In 2020 the world faced an existential crisis and earnings cratered, and the markets had an even better year!
Trying to predict the markets is so futile, that even just this past week I was listening to a podcast in which a very smart and well-respected market strategist spoke about the upcoming Georgia Senate run-off vote and he more or less guaranteed that a Democrat sweep would push the markets lower. Not only did the markets actually forge a new intraday high the next day, but the U.S. faced a literal insurrection in their Capitol building and the markets still shrugged it off!
In hindsight, the best advice I gave in last year’s review were the “resolutions for the next decade” Those resolutions—if followed—guaranteed successful investing in 2020, and I think they will again in 2021 and every year after that, so I listed them again at the end of this post.
What keeps annoying me about market prognosticators is that at any time you can get the whole spectrum of predictions, from bearish to bullish. When people’s predictions go wrong, you just don’t hear from them again, or they adjust them, or move on to new predictions. Meanwhile, those who end up being right come out of the woodwork and thump their chests. The perma-bears, who sound super-intelligent in their arguments but get proven wrong more often than right, only show up after a market crash. On the same token, the tech billionaire who aggressively invested in Tesla and Bitcoin could have been totally washed out if the odds went against him and you wouldn't have heard of it, but now he’s out proclaiming his brilliance on Twitter (I’m not going to name names here, but anyone following FinTwit probably knows of whom I speak).
Following are some actual good market/economic reviews/commentaries that I think you should read. They mostly don’t make predictions, but they give a really good lie of the land as we begin this new year, and what actually happened behind the numbers last year.

Capital Group's 2021 Outlook

First and foremost, a perennial market outlook that I’ve been sharing with clients for almost the past decade is Capital Group’s annual outlook. I love their easy to read PDFs full of informative infographics. You don’t even have to read it all; just look at the pictures. 
Their 2020 Outlook obviously predicted nothing about Coronavirus, but in review it was informative on all the other major influences and trends on the market that year (and much of the info in that outlook carries through into 2021). 
My own take-aways from this year’s outlook:
  • Higher growth expectations outside of U.S. for the coming year, especially in Emerging Markets.
  • Fighting the Fed in 2020 proved disastrous and that won't change going forward.
  • If China's an indication, air travel should rebound quickly, whenever it is able to.
  • Renewable energy is for real, and there are some serious (profitable) players here (everyone investing in my Elementum Portfolios has exposure to some of these).
  • There remain plenty of innovative opportunities outside of the U.S. at cheaper valuations (such has been the case for years now, eventually the global markets will figure it out).
  • Core high quality bonds served balanced investors well in 2020 and should continue to balance out equity risk going forward.
  • You might be overweight U.S.: you most certainly are if investing 100% passive, using a global equity ETF, which due to outperformance in U.S. stocks is now over 60% U.S. equities. Or if you were active and chased the biggest stocks. My own strategy keeps to a balance of 50/50 U.S./Intl. I've noticed Cap Group's Global Equity fund actually go majority international of late.

Two Worlds: So Much Prosperity, So Much Skepticism 

Morgan Housel and his collaborators wrote this tremendous post, that’s a bit of a longer read but well worth it. It’s not only a good retelling of the year that was and where we are now economically (pretty much at an economic nirvana, as a whole, if you can believe it) but also how there really have been two worlds, experiencing the past year quite differently.

JP Morgan's Guide to the Markets

For some more granular detail on the current state of the economy and markets, check out JP Morgan’s latest Guide to the Markets. This gets updated quarterly and is pretty freely available on their site. It’s a ton of graphs; I often page through them pretty quickly until something catches my eye, but for year-end 2020 pretty much all are interesting. A lot of these graphs put the short-term that we get in news reports or market updates into longer term perspective (just how overvalued are we now in relation to history, see page 5) and others delve deeper into where there might be value to be had in the global markets.

Waiting For The Last Dance

To give a more bearish perspective, I’ll share a piece that’s been making the rounds of late, from Jeremy Grantham. His firm GMO is known for its value investing approach and this piece is a nice sequel to a piece they wrote in the fall entitled “Tonight, We Leave the Party Like It’s 1999".
I don’t read either of these posts as “run for the hills”, but keep in mind the party will end at some point. At some point, we’ll be faced with yet another bear market, and the key thing I take from both these posts is to avoid chasing growth stocks and to keep an eye on the more value-priced parts of the market. Not every stock in the S&P 500 index is trading at over 30x price/earnings. Perhaps the next leaders are to be found in boring old banks and industrials, and international stocks, or—as was the case in 2000—maybe those areas are the best to hide out in?

The Ten Surprises of 2021

Finally, for a bit of prognostication, check out this post from Blackstone, where they posit a number of potential surprises for 2021 (if we haven’t had enough already). It’s mostly pretty positive and fun.


Okay, I will prognosticate a little based on the above, if you'll permit me. If we expect that the world will get past the COVID-19 pandemic at some point this year—and the history of scientific progress suggests we will—there will be a ton of pent up demand for a variety of things and experiences which will be a major boost to the economy. Keep in mind that stocks very much already factor this in: Expedia, for example, currently trades near its all time highs with the expectation that they will ring in a lot of travel $ at some point. 
I don't know how much longer U.S. large cap growth, in particular high tech companies, will continue to lead the markets and to what lofty price/earnings multiples they may rise to. I've been proven wrong on them too many times. I mean, Tesla now trades at a valuation equal to more than $1.5 million for every car they produced in 2020. Maybe the trends that started this past November though will continue and the markets will start to pay more attention to lower valuation companies and small caps that have been overlooked for years. 
As well, while U.S. stocks have grown to make up over 60% of the market capitalization of stocks globally, the U.S. economy is only a quarter of the world's GDP. Something's gotta give there too, and I'm seeing much cheaper valuations for international developed market stocks (this has been an ongoing theme in Cap Group's updates) and an Emerging Markets asset class that has been underperforming for the past 15 years despite the fact that it's where most of the world's population and GDP growth is occurring (and proportionally far less of the world's government and consumer debt).
As promised earlier, my investing new years resolutions for 2021, which are the same as in 2020 and will probably be the same in 2022:
  1. We will not check our investment account/statements more than is absolutely necessary (quarterly at most; I check mine once a year usually).
  2. We will not invest any money without at least a basic, rudimentary financial plan. To help out non-clients, I’m again offering my Jumpstart modular fee-based planning for non-clients.
  3. We will invest our long-term (10+ year) assets primarily in the great publicly traded companies of the world, or funds thereof.
  4. We will not invest 100% of the money that we or our families might need access to in the short to medium-term (ie: less than 10 years) in stocks. Some or most of this money should be in safer stuff.
  5. We will not buy into fads. When everyone is talking about investing in X, we will avoid investing in X. If we happen to already own X, we might consider selling it to the highest bidder.
  6. For our long term assets, we will treat every decline in the markets as an opportunity to buy more at cheaper prices. Every decline, no matter how scary the newspaper headlines are.
  7. Whenever the markets are on a tear, we’ll review our portfolio allocation as it pertains to our goals, rebalance, and re-allocate that money we need in the short term to cash. Again, we will do this when the markets are hot, or stable, and not when they’re down and we suddenly need cash.
  8. If we still get cable at home, we will cancel the financial noise networks off our cable packages.
  9. We will instead subscribe to the Muhs Wealth Partners eNewsletter.
All the best investing success in 2021!
Investment Advisor & Portfolio Manager