Happy and Healthy New Year to you and your loved ones! We hope that you and your family are healthy and safe.
Who will ever forget 2020? It seemed like a big picture film – a deadly global pandemic – except it was not a movie! COVID-19 threw global economic activity into a historic downturn and drove global markets into a frenzied panic. The virus was a wake-up call of epic proportions. It reminded us how precious life truly is and that we can never take anything for granted.
As we put 2020 behind us and hopefully never experience another 365 days like that again, the continuing question many are asking is how could the capital markets perform so well in a year of such gloom?
2020 Market Recap
To say the least, it was a tumultuous and chaotic year, almost unimaginable to many. The S&P 500 was down approx. 34% on March 23, and for the calendar year ending December 31, 2020, it ended positive 16%; the Dow Jones Industrial Average up 7%; and the MSCI All Country World Index was up 14%. The market’s rally occurred in the midst of an economy that was in the depths of despair.
Monetary and fiscal policy not only rescued the markets but supercharged them, along with human ingenuity, scientific genius and modern technology all working in tandem. In addition, the rise in savings among professional workers had an immense impact in lifting nearly all financial assets. The following illustrates how Americans earned and spent money during the pandemic, as well as a plausibility of why the market behaved the way it did in 2020.
- Total employee compensation was only down 0.5% for the “pandemic” nine months in 2020. How is this possible? The numbers show the majority of people unemployed as a result of the pandemic were in lower-paying, service jobs. Higher-paying, professional jobs were more likely to be unaffected, and a handful of other sectors were booming which led to higher income for those workers. Were we the only ones who had Amazon, UPS, Door-Dash, Insta-Cart, etc. coming to the house at what seemed like an hourly occurrence?!
- In total, unemployment insurance programs pumped $499 billion more into Americans’ pockets from March to November than the previous year; $365 billion of it was a result of the expansion in the CARES Act.
- The P.P.P. (Paycheck Protection Program) prevented a collapse in businesses and/or business owner’s income so much that income rose narrowly, by $29 billion, but would have fallen by $143 billion if not for the P.P.P. and a coronavirus food assistance program.
When it’s all tallied up, Americans’ cumulative after-tax personal income was $1.03 trillion higher from March to November of 2020 than in 2019, an increase of more than 8%.
As always, income is only part of the equation – what about spending? Services spending fell by $575 billion, or nearly 8%. Durable goods spending was up by $60 billion. So households were not only taking in more money, but also spending less of it. Total outlays fell by $535 billion.
This combination of higher income and lower spending, increased the U.S. savings rate dramatically. From March through November, personal savings was $1.56 trillion higher than in 2019, a rise of 173%!
So where did the savings go? Deposits in commercial banks — up by 19% since the first week of March, home purchases – the S&P CoreLogic national home price index was up 8.4% in October from a year earlier and yes, the stock market! [i]
Certainly monetary and fiscal policy played an integral role as interest rates are near 0%, government debt purchasing and more, but let’s not discount the impact of household savings and investing.
Admittedly, we are by no means out of the woods with COVID-19. The next several months will most likely see hospitalizations and the death toll climb as vaccines continue to roll out.
It seems almost a forgone conclusion that another fiscal aid package from President-elect Joe Biden will be coming relatively shortly. While we’ve taken out an enormous amount of debt to cover the cost of the pandemic and previous economic crises (national debt @ $28 Trillion), there will be more spending to help individuals, businesses and to invest in our country’s future (education, physical infrastructure, etc.) As with the stimulus legislation signed by President Trump, any new fiscal support should be considered more as downside protection than as a catalyst for a near-term surge in growth.
Much has been said about the markets preferring split government, but as the Democrats will rule by the narrowest of margin, it seems any dramatic changes to individual, corporate and capital-gains tax rates will almost certainly have to be modest to gain sufficient Congressional support.
As far as the market, was it a little ahead of itself in 2020? Have much of the gains “prognosticated” for 2021 been borrowed in 2020? Seems almost too much common sense to say yes and there will be a market exhale within the next 6 months. If this does happen, we believe it would be a buying opportunity. As far as stock valuations, many observers (ourselves included) feel that stocks are not expensive relative to other assets (i.e. government bonds), but are expensive relative to historical, absolute levels. In our opinion, as long as the Fed continues to print enormous sums of money, capital markets will trade at a premium and any correction will be short lived. With massive monetary and fiscal accommodation as a tailwind, herd immunity expected mid-year or a bit later, enormous pent-up demand, the economy should perform well in the back half of 2021.
As we have been advising clients for 20+ years, it’s important to separate the market’s performance from that of the economy’s. Capital markets are discounting mechanisms. At the end of the day, markets are interested in sales and profits – the “bottom line.” If the perception is an increase in taxes will be modest and regulation less aggressive than feared, then markets will focus on a post-COVID recovery, fueled by easy credit, pent-up demand, fiscal stimulus and the Fed’s willingness to print sufficient cash.
But as 2020 taught us, life is more unpredictable than we might think, and appreciate what you have today. When it comes to your financial goals and investing, keep the focus on the long term – when you need income from your money and how long will you need it for.
Looking forward to a better 2021 for you, your family and our country!
As always, if you have any questions or would like to discuss your accounts or financial situation further, please call your advisor directly or email us at firstname.lastname@example.org. Please visit our website at www.benchmarkfinancial.info for more information on our planning services.