2020 is ending like it began the year with U.S. stocks trading at new all-time highs and in a strong bull trend. It was one of the worst pandemics in a century, and the global business lock-down was unprecedented.
The COVID-19 pandemic and the aftermaths of the global business lock-downs destroyed countless lives, devastating life savings, shut-down numerous mom-and-pop small businesses, and put innumerable Americans out of work. But the year was not a total financial washout.
One of the key points for this year was the economy, the stock market, and Americans, in general, were more resilient than many pundits expected, defying the unexpected shocks earlier in the year.
The bifurcated economy that developed soon after the pandemic hurt many Americans, but it also benefited a few. The Institute for Policy Studies reported 56 new billionaires in the U.S. this year, bring the total number of billionaires to 659. The wealth held by a select few Americans jumped by more than $1 trillion this year. American billionaires now control around $4 trillion in wealth.
Given the challenges that the world faced this year, stocks have done exceedingly well, surprising almost everyone. Stock market returns defied expectations. The large-cap S&P 500 Index (SPX) surged 71% from its March 2020 low. Despite the 34.51% decline from February to March, SPX is poised to return an impressive 14.56% return. It will far exceed the street consensus forecasts of around 5% and surpassed its historical average yearly return of 9-10%. The SPX Index will break several records this year - the fastest-ever bear market recorded (33 days) and the third-fastest stock market recovery to its breakeven level (about five months).
Although the blue-chip Dow Jones Industrial Average (INDU) lagged its equity peers, it still managed to rebound strongly, gaining 12,375 points or 67% from its March bottom with respectable gains of 5.34%. The best index remains the technology-laden NASDAQ Composite Index (COMPQ). Technology stocks had a stellar year as the COMPQ rallied an astonishing 95.6% from its March low. It is now poised to end the year with gains of 41.55%.
The economic recovery from the March bottom accounted for the bulk of this year's stock market gains. You can thank the government's COVID-19 fiscal stimulus packages, the massive injection of liquidity from the FED, and the rapid development of multiple COVID-19 vaccines. Resiliency is a central theme this year, and it will likely be a recurring theme during 2021.
Here is the U.S. stock market in review:
U.S. Stock Market 2020: A Bull, A Bear, and another Bull
The year started with a Bull run that carried over from the strong 2019 rally. It was followed by a brutal but very short-lived bear market in the middle, and then the resumption of the Bull run coming from its March bottom. That scenario has happened only one other time in recent memories — during the 1987 timeframe. Many were also surprised by the speed and the magnitude of the recovery from the October 1987 stock market crash.
From a technical perspective, it is interesting to note that an external event (program trading/index arbitrage) led to the October 1987 stock market crash. Today, you can blame the exogenous event on the medical pandemic. The 1987 bear decline also occurred amidst an ongoing structural bull trend that started in earnest in 1982. This year's February to March bear market decline also developed during the May 2013-present structural bull. The lesson learned is investors should not underestimate the power and the resourcefulness of a structural bull market even with a backdrop of geopolitical turmoil, domestic election concerns, macro uncertainties, and an ongoing pandemic.
Main Street versus Wall Street
There was a visible disconnect between the stock market's rebound on Wall Street and the sluggish overall economy in Main Street. It is unbelievable to think the stock market can rebound so strongly when nearly 5 million more Americans are still unemployed today, as compared to before the start of the lock-down in February. The National Bureau of Economic Research (NBER) has yet to call an official end to the recession that began in February. What will happen to the economy and the stock market when NBER finally declares an end to the February 2020 recession?
Technically speaking, it is not unusual to see the stock market discounting pivotal turns in the business cycles months and even quarters in advance of the actual occurrence. For instance, in past bull markets such as the prior one that began in March 2009, the stock market quickly recovered while the economy and NBER did not officially call an end to the recession. The market may be looking past a one-time event (pandemic) rather than pricing in something structural wrong with the economy and hence the stock market. However, it is still important to remember the pandemic may have materially changed how we work, live, play, and interact with our family, friends, neighbors, colleagues, and peers. Work-from-home is likely an enduring and long-lasting trend that will impact all Americans and investors for many years to come. Working from home will continue to accelerate the current technology trends (i.e., cloud computing, artificial intelligence, big data, social media, e-commerce, etc.). This monumental shift will equally impact Main Street and Wall Street.
Monetary Policy and Fiscal Policy
The aggressive stance by the FED, flooding the financial system with liquidity, and Congress enacting one of the largest economic stimulus packages in U.S. history helped to stabilize the economy. It may have prevented a more severe financial crisis. By the end of March, the FED has slashed interest rates to near-zero and established new quantitative easing (QE) programs to back up loans and keep the credit markets from collapsing. At the same time, Congress passed a historic $2-plus trillion fiscal stimulus package offering relief to many Americans out of work and backstopping small business owners from declaring bankruptcies. The assurances from the FED and the decisive actions from Congress quickly help to stabilize the markets.
Economists and strategists were relieved the FED and Congress acted so swiftly and decisively. Like the aggressive stance taken by the FED and the government during the height of the Great Recession, monetary and fiscal policies are a needed lifeline during extreme conditions in the marketplace. The ability of the economy to fully normalize is dependent on Americans resuming their normal day-to-day activities again.
From a technical view, we look for the market response as the ultimate confirmation the implemented monetary and fiscal policies are effectively working. After all, the stock market is a leading economic indicator and is forward-looking. While some are warning of another double-dip recession during the first quarter of 2021, the recent approval of the $900 billion stimulus program or the second-biggest in U.S. history will either help to confirm or not confirm the economy is indeed gaining traction. Market leadership comes from the broadness of the bull rally and most importantly, from investors favoring economically sensitive sectors and industries such as Consumer Discretionary, Industrials, Materials, Financials, Technology, etc. They are great proxies of sustained economic growth and often engines of growth to recoveries. So far, it appears investors are buying into a sustainable economic recovery. The top four S&P 500 sectors for the year by YTD returns are currently Technology (XLK – 43.41% YTD), Consumer Discretionary (XLY – 29.56%), Communication Services (XLC – 25.89%), and Materials (XLB – 19.99%). If the above trends continue in 2021, then a double-dip recession can be avoided. However, we may need to monitor closely the consequences of massive monetary and fiscal policies. It can also lead to a market melt-up scenario and rising inflation during 2021. A scenario that is also possible based on the precedence of U.S. stock market bulls ending with a bang via a spectacular blow-off market top.
Large-Cap Techs, FAANG plus MSFT, Growth stocks, and Small Caps
This year we witnessed a dichotomy and significant shifts within the overall market itself. It is quite unusual to find that when stock prices collapsed from February to March, many non-professional investors did not sell but were looking for buying opportunities. The stay-at-home and work-from-home trends may have created a new breed of traders or investors. With the number of traders and investors trading through Robinhood Financial and other stockbroker electronic trading platforms, these part-time computer-driven traders may begin to crowd in and out of a limited number of stocks. These traders can help accelerate the shift into the remote work technology stocks, and the stay-at-home plays to new record highs and, in the process, drive the broad market to speculative levels next year.
The large-cap technology companies (FAANG plus MSFT) led the market out of this year's bear market. The technology-heavy NASDAQ Composite Index (COMPQ) traded to new all-time highs during June or nearly two months before the S&P 500 Index (SPX) recorded its all-time high. The discrepancy between growth stocks and value stocks reached extreme levels. So, the pertinent question remains whether growth style investing can continue with its outperformance cycle next year? Or will there be a structural shift to value style investing, international investing, and small caps and mid-caps? Either way, we will closely track market breadth, market internals, sector rotations, and market sentiments for clues for directional trends.
With interest rates at near-zero and no other alternative place to invest, retail and institutional investors may continue to play the musical chair game of rotating in and out of various individual stocks, sectors, markets, and securities next year. The stock market can continue to climb to new highs if speculation does not escalate into bubble levels.
We wish you and your family a Happy, Healthy, and Safe New Year.