Wow, what a year 2020 was! It was quite a challenge this year fitting noteworthy events on the chart below and I probably didn’t do it justice. Exhibit 1 shows the weekly % changes in the S&P (green and red bars) and the level of the index (black line). The annotations are the major stories of the year that [could have] affected the markets. It’s not meant to be a comprehensive list, just my personal observations.
The year started with impeachment hearings, Middle East turmoil and massive fires in Australia. It then moved on to a global pandemic as COVID spread around the globe. April also featured oil price war that lead to the commodity briefly dropping to negative $37 per barrel. Federal Reserve and Congress stepped in with massive rounds of stimulus and rate cuts. Unemployment claims saw a string of unprecedented readings of 3 to 7 million a week; they are still running at 800,000 a week (for context, normal pre-pandemic level is about 200,000). We lost 20 million jobs in April alone and the unemployment rate peaked at 14.7%. Retails sales dropped massively as lockdowns rolled through the country. Q1 GDP was down -5% only to be blown away by -33% in Q2 but rebounding to +33% in Q3 (these numbers are not intuitive and aren’t nearly as bad as they sound). There were massive civil rights protests around the country in the wake of George Floyd’s (and many others) death. Then Ruth Bader Ginsburg died leading to a fight over the Supreme Court vacancy. And of course, it was an election year with plenty of drama at the primaries, the conventions, election logistics during the pandemic, delayed results and refusals to accept the outcome. Throw in two Senate runoffs in Georgia and it comes out to the most “interesting” year in politics since I don’t know when (Watergate? Civil War? The Constitutional Convention?). And I’ll save the yesterday’s mess at the Capitol for 2021 review.
On top of all that, it was a very bad year for natural disasters with wildfires and hurricanes. Not to mention massive shifts in societal norms with Work-From-Home, Zoom, Peloton and “death of cities” as urbanites escaped to the country to weather the pandemic.
On the positive front, we had remarkable scientific breakthroughs as Pfizer, Moderna and AstraZeneca developed vaccines that got approved in December after only 10 months!
All of this makes 2019 look positively quaint.
Exhibit 1 – 2020 S&P 500 Timeline
So how did all this turmoil affect the performance of major asset classes? Confusingly to most (myself included), majority of assets had nice positive performance with all varieties of stocks and even some bonds featuring double digit returns (Exhibit 2). Oil and USD were the only negative areas. Growth stocks had a massive year with Nasdaq up almost 50%; even small cap stocks outperformed large caps for the first time since 2016. It wasn’t all smooth sailing though, as the market sold off sharply in the early stages of COVID panic. From the high on Feb 19 to the low on Mar 23, S&P 500 fell 33.7% which officially qualifies as bear market (20%+ drop). It was the fastest bear market since at least World War 2 as it took only 22 days (17 trading days) to hit the 20% threshold and 33 days to bottom out. From March 23 market had a furious rebound and completely recovered by August 13. Again, one of the fastest recoveries from a bear market ever at 143 days.
The only things that held up during the March selloff were the traditional safe-havens of high-quality bonds, gold (somewhat) and the dollar. Exhibit 2 also shows maximum 2020 drawdowns for all asset classes regardless of the date they registered as well as current distance from 2020 highs. Most things are very close to year or in most cases all-time highs with the exceptions of those safe-havens and oil (which is a mess), indicating “risk-on” environment.
Exhibit 2 – 2020 Performance for Major Categories
Let’s quickly look at detailed fixed income universe breakdown (Exhibit 3). Convertible bonds ended up with a massive 53% return but also had to withstand 32% drawdown. Other riskier bonds had large sell-offs too but haven’t recovered as well the convertibles. Safe bonds did extremely well driven by Fed cutting rates all the way down to zero and flight to quality. It’s quite likely that government bonds pulled forward a few years of performance into 2020 and we might not see much return there for a while. (But we use those for ballast to offset stock volatility, not maximizing return).
Exhibit 3 – 2020 Performance by Fixed Income Groups
In the next post, I will take a closer look at sector and stock performance.