As we enter the second quarter of 2021, let’s take a look back over the eventful last 12 months. We believe a vital tool in managing money is a respect and knowledge of market history. It is helpful in examining market movements during volatile periods to test our principles and perspectives.
In January and February of 2020, media reports surfaced regarding a newly-observed virus in China. Markets held up reasonably well until the middle of March. Then, it suddenly turned ugly as the world came to realize that we were fighting a spreading menace that would result in a global lockdown.
Markets are very volatile. It feels bad, but it’s okay.
During high volatility, the New York Stock Exchange imposes “circuit breakers” to help maintain orderly markets. Trading is halted if the market declines over 7% in one session. On March 16th, 2020, trading was halted shortly after the open. This was the third halt in six trading days. The Dow fell 13% that day, the second largest percentage drop since WWII. The NASDAQ index fell 12%, the largest on record.
With these significant losses, it looked bad. The decline would continue for another week, totaling a 34% loss for the S&P 500. Then, on March 24th, markets stabilized and started trending up, aided by the prospect of massive stimulus by international governments. By August of 2020, markets would recover and reach new highs with advances continuing through the end of the year.
We are not minimizing the pandemic. We are mindful of the human and financial losses COVID-19 has caused people around the world. These losses go far beyond money. We are, however, always aware that deep equity declines, by lowering the price of quality investments, often sow the seeds of unexpected and powerful recoveries.
Media enriches our lives, but has its limits in building portfolios.
Over the years, media companies have enhanced our lives with information and entertainment. They were even more present during the quarantine, allowing us to both remain connected and provide escape. That being said, there is a challenging side. During the declines brought on by the pandemic, there were seemingly endless reports on the losses. There were also numerous economists and market professionals that sensationalized the potential worst-case-scenarios.
These economists do not know you, your portfolio or your circumstances. Also, a truly deep analysis can’t easily fit between commercials nor would it likely produce good ratings. For that reason, while we enjoy Netflix or Disney+, we prefer to make our most-important financial decisions with the television turned off.
Diversification is key to success.
Diversification goes beyond just a mix of stocks and bonds. It is important to have a proper mix of different kinds of equities. As the recovery began, growth companies that provided computer and medical technologies surged. Value stocks like financials, transportation and hospitality were largely left behind. In 2020, growth stocks outperformed value by one of the largest margins in market history.
Once the development of vaccines was announced, value stocks took the lead with the potential reopening of the world. In the first quarter of 2021, value led growth by a large margin. Many tried to predict and time these massive shifts likely without success. We believe the best result may come from exposure to several asset classes, rather than trying to time the shifts. Building wealth doesn’t necessarily come from the buying and selling. It comes from intelligent allocation and patience.
Domestic Equities: Building on the strong returns of last year, the S&P 500 rose 6.2% in the first quarter of 2021 as the rally continued to spread beyond the large-tech stocks. Smaller company stocks, which perhaps have the most to gain from a reopening, jumped 12.7%.
International Equities: Foreign stocks also benefited from the potential return to a more normal global economy as the percentage of people vaccinated rose. The results were, however, somewhat restrained. The MSCI EAFE index, a gauge of international developed market stocks, increased 3.5%. Emerging markets edged up 2.3% for the quarter.
Fixed-Income: As the pandemic threatened economic activity, the Fed quickly reduced interest rates along with other actions to help stabilize the economy. This provided a tailwind for bond returns in 2020. Up until this point in 2021, the opposite has been the case as business activity rose and the unemployment rate declined. Some wondered how long the Fed would and could keep rates low. The Barclays Aggregate, a measure of the broad bond market, dropped 3.4% in the first quarter. Bear in mind that for the trailing 12 months, bonds were still positive by 1%.
We’re in this together.
As the past year has shown, both the world and financial markets can be volatile and unpredictable. Previous events, while perhaps not as unsettling as this one, like Brexit, the European debt crisis and many others have shown, we as investors can, and have, come through them. What is key is to have the correct principles and discipline.
While it is gratifying to see the world come through this and investors rewarded so handsomely, it is important to remember not all of this is behind us. We must still navigate the likely setbacks and reversals to the economy and markets that may come. We must continue to make the transition from an economy that is dependent on governmental support to one that can thrive on its own.
None of this will be easy. It never is. That isn’t to say we are pessimistic – far from it. We just have continued work to do.
We will be here to listen, work with you and adjust accordingly.