Franklin Delano Roosevelt famously said of December 7, 1941 that it was a day that would live in infamy. It may be a stretch to suggest that the year 2020 will as well, but it certainly is a year we won’t soon forget. In finance, we learned that altogether new forms of opportunity and risk in investing can develop, and we experienced a cyclical recession and bear market in a different way than ever before. Let’s look back at 2020 and it’s lessons, as well as the likely outlook going forward. In this unprecedented year, many tried and true personal finance and investing precepts were valuable if properly applied, but this year also called for new methods of analysis and response.
We have generally become accustomed to expect that a cyclical recession and cyclical bear market will occur over a span of four to six quarters. Late in the business cycle, markets become expensive, ongoing growth becomes difficult to sustain, and a catalyst arrives to trigger a top in the equity market and the business cycle. In the first quarter, US unemployment set new all-time record lows and growth continued to surprise on the upside. Then COVID-19 caused the world to voluntarily shut down most of the global economy.
The rapid cyclical bear market that occurred was like none before it, with the market peaking on February 19, and bottoming on March 23, down over 30%. By late August the market had already fully recovered in a dizzying and unprecedented rally, that was fueled by fiscal and monetary stimulus that came both in record time, and at record levels. In the last two prior recessions, the 2000-2002, and 2008-2009 recessions both took well over a year to develop and then bottom. The 2020 recession took only a couple of months before the economy began to once again expand off the bottom.
The question now is where do we go from here, and where will we find opportunity. Much of the economy has already fully recovered to its February levels, despite the ongoing COVID-19 infections, hospitalizations, and deaths. While the trend of infections is rising, the numbers of those being tested is greatly expanded from the early stages of the pandemic, and the percentages of fatalities is much improved from the early stages of the disease. In certain businesses such as restaurants, bars, hospitality, transportation, entertainment, and retail, conditions remain difficult. With several vaccines just around the corner, the outlook for those businesses should materially improve, but some unfortunately may not have the staying power to get through. This happens in every recession.
What comes next? Publicly traded companies are generally better able to adapt and prosper in difficult environments than smaller companies. That, along with historically low interest rates, ongoing massive monetary and fiscal stimulus, a likely divided government, and rapid progress on vaccines and therapeutics for COVID-19, should create a benign if not fertile backdrop for equities. It is not enough to hope we just get back to where we were pre-COVID. The next business cycle should last years and grow well beyond February 2020, as all cycles have in the past but one. We humans are highly adaptable and persistent, particularly here in the US. I hope you’ll remain optimistic as do I, and I hope you and your families have a safe, healthy, and prosperous Holiday season and 2021.
Contact Kelly Dougherty