Thomas J. Mudge III, CFA, Director of Domestic Equity Research
December 31, 2020
2020 was definitely not the year so nice that they named it twice. In addition to the far-reaching impacts of the COVID-19 pandemic, the U.S. experienced a Presidential impeachment, urban riots, the most active and seventh-costliest Atlantic hurricane season on record, massive wildfires across the western states, and perhaps the worst-ever state-sponsored cyberattack in its history.
On the positive side of the 2020 ledger, several successful COVID-19 vaccines were created in a matter of months, and historic Middle East peace accords were also reached. While not unique to 2020, trends in world poverty, child mortality, chronic hunger, and exposure to a broad range of environmental toxins continued to decline, and global literacy rates continued to rise.
Perhaps surprisingly, stock markets around the world produced positive returns in 2020. The S&P 500 Index, after plunging early in the pandemic, rose to new all-time highs within a few months and finished the year up 18.4%.
Comparing Pandemics Notably, the U.S. stock market behaved similarly when the last great pandemic, the Spanish flu, swept the globe in 1918. At least so far, the COVID-19 pandemic has proved less deadly than what humanity experienced over 100 years ago, which killed at least 50 million worldwide and—according to the Centers for Disease Control and Prevention—caused an estimated 675,000 American deaths out of a much smaller population of 103 million at the time. Yet through it all, the stock market (as measured by the Dow Jones Industrial Average, or DJIA) rose 10.5% in 1918, and another 30.4% in 1919.
While the end of World War I certainly contributed to the market’s rise, the stock market’s behavior through this pandemic, and other subsequent less-lethal epidemics, suggests that investors perhaps view these events as different from other causes of economic slowdowns. That is, the crisis is perhaps akin to a natural disaster, like a hurricane, where business is temporarily suspended as opposed to an overarching change in business outlook (e.g., the Great Depression or the Global Financial Crisis). Regardless of the precise motivation, in a year with a shortage of good news, the stock market’s success was a welcome positive note.
New and/or Accelerated Trends As the year progressed, investor thinking evolved in sometimes predictable and other times surprising ways. Tech giants—known as the FAANG stocks, or Facebook, Amazon, Apple, Netflix, and Alphabet (formerly Google)—already made up a significant portion of the S&P 500 Index’s overall market cap due to their rapid growth in recent years. Yet in 2020, they became the poster children for the phrase “the rich getting richer.” The pandemic forced people to stay at home thereby increasing demand for home delivery (Amazon) and virtual entertainment (Netflix, Facebook, Alphabet, Amazon, and Apple), and also boosting the need for internet/cloud computing access for work (Alphabet, Facebook, Apple, and Amazon). At the start of 2020, the five FAANG stocks made up 13.0% of the total value of the S&P 500 Index. By year-end, that share had increased to 17.3%.
As the U.S. has shifted toward a predominantly service economy in recent decades, the viability of working from home increased, and technology evolved alongside. The pandemic required almost everyone who could do their job remotely to do so, essentially leveling the playing field from a career advancement standpoint, at least in the short term.
The trend toward automation certainly accelerated due to the pandemic, especially in industries that would otherwise require close human contact for long periods. It was also a record year for initial public offerings (IPOs). On the flip side, the popularity of just-in-time inventory management and low-cost foreign outsourcing both faced significant setbacks in 2020. These systems are exceptionally vulnerable to the shipping restrictions and delays that became commonplace during the pandemic.
An Unusual Double Relief Rally While painful for personal, professional, and financial reasons among many, there can be light at the end of the proverbial tunnel. When market bottoms occur, investors anticipate a coming recovery, and stocks that were previously seen as potentially unable to survive the downturn will often rally strongly if they make it through. These “relief rally” stocks are given a new lease on life and have historically outperformed as a result. When the stock market bottomed on March 23, 2020, relief rally stocks behaved as usual, but this year there was an added twist. On November 9, when Pfizer announced the completion of successful COVID-19 vaccine trials, there was a second relief rally as the uncertainty regarding the future of the pandemic greatly decreased. In retrospect, this second rally seems obvious, but it was very different than what happens in a typical recovery and caught many investors off guard.
Government Stimulus with the Specter of Inflation Governments’ fiscal and monetary responses to the economic consequences of mandated lockdowns resulted in massive borrowing and stimulus spending, as well as accommodative monetary and interest rate policies. The world seems to be experimenting with Modern Monetary Theory, which is the controversial notion that governments can, to a point, pay their bills by essentially printing money and avoiding the (potentially disastrous) inflationary consequences.
Many market participants are rightly skeptical that inflation will remain at bay given these government policies and, as a result, both gold and cryptocurrencies had very strong years in 2020. Gold rose 25.1% and Bitcoin rocketed 307.8% for the year.
Looking Ahead There were of course other changes and surprises in 2020, far too many to mention here. Some may have lasting impacts, while others may just be of passing interest. The world has changed enormously since the last global pandemic 102 years ago, and it is too early to tell exactly how the aftermath of this one will shake out.
No one predicted the events of 2020, and very few even correctly guessed how the year would unfold once the impact of the COVID-19 pandemic was apparent. Given that backdrop, let us all hope for a better year ahead in 2021.