2020…A Decade to Remember
Thanks for your concern; my chiropractor says I’ll be fine but my neck still hurts! From the quickest selloff in history to the fastest stock market recovery, living through 2020 felt like living through an entire decade. I’ll leave it to you to decide which decade you’d like to relive, but I’m going for the 1960s – though maybe skimming a few years from the late 60s and adding them to the late 50s.
For those who weren’t alive (or can’t remember), the early to mid-1960s was a time of low unemployment, low inflation and strong GDP growth prompted in large part by JFK’s tax cuts. Away from the economy however, and later on in the decade, it was a time rife with significant social problems and political divides, problems with which after 60 years of lackluster progress, our nation continues to struggle. As is often misattributed to Winston Churchill, “Democracy is the worst form of government, except for all the others.”
Yet after the exceptional year that was 2020 and the initial weeks of 2021, our democracy still stands, albeit perhaps on slightly shakier footing. So too our economy still stands and our markets continue to function. Despite significant political gridlock, contested elections, civic unrest, plummeting GDP numbers, a global pandemic and other significant headwinds, US markets proved their resiliency and finished the year trading near all-time highs.
Of course, this wasn’t without significant market support, most notably from the Federal Reserve which implemented policies to support (global) markets and committed to a lower-for-longer interest rate environment. Additional (and rare bipartisan) action taken by Congress in the form of the Cares Act in early 2020 and the Appropriations Act passed in December added to investor’s confidence. Looking forward, as the markets always do, the market anticipates a continued economic recovery, improving vaccine distribution and additional stimulus under the new, blue-for-you Biden administration.
So, what should you do?
Don’t panic, Zoom out and focus on the long term. Sure, I come back to this mantra when the markets are selling off as they did in March of 2020, but it’s important to maintain discipline in times when markets may look a bit frothy too. Today, the US stock and bond market look pretty high, not only on price, but more importantly based on various valuation metrics and expected growth. This is particularly the case for the largest growth companies (for those thinking in style boxes, think up and right).
That doesn’t mean sell. It does, however, mean it may be time to review the role that value stocks and international stocks and bonds play in your portfolio. As a portion of your stock (and stock fund) holdings, international can be up to 40% of your total stock holdings. Remember, the US accounts for approximately 55% of global GDP which means if you were placing chips on a table based on where the global economy sits, 45% of your chips would be outside of the US! As for value, research shows that value stocks – those that often pay dividends, have good cash flow and are less expensive relative to their faster, more expensive “growth” brethren – consistently outperform over long periods of time.
Although we’re only a few weeks into 2021 and I’m rarely accused of being an optimist, I know this year will be better. How do I know? I’m hopeful that the difficulties of 2020 bring out an appreciation for what we do have in 2021. If we use the past as a guide (the late 60s for example) each generation has faced significant challenges, and America has continued as a successful economy and democracy. If for no other reason, I’m feeling pretty good about 2021 now that my neck stopped hurting!
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