2020 was a historic year, full of surprises. Nobody expected a global pandemic or how global stock markets would react to it.
Global stock markets declined in unison in the first quarter of the year following the outbreak of a pandemic. It was one of the fastest market crashes in history. Practically all markets experienced double-digit losses in the first quarter, most well in excess of -20%.
Shelby Davis once said, “Bear markets make people a lot of money, they just don’t know it at the time.” The global crash in markets gave everyone the opportunity to experience what Davis describes.
Of course, Davis’s quote only hints at the mental difficulty of the prospect. Those who buy stocks in a bear market are eventually rewarded. The difficulty lies in not knowing when or how big the reward will be. Nevermind that buying stocks amidst a crash feels about as unnatural as…social distancing.
The natural response is flight. Protect what you can. Get money out of the market.
But selling rather than buying leads to two mistakes. First, selling locks in losses at a discount to what stocks are really worth. Second, sellers are left with the decision of when to buy back in. The best time to buy is when things look their worst. Rather than buy stocks at a deeper discount than when they were sold, most sellers wait for when it feels safe to buy stocks again. But by then, it’s too late. They miss the recovery.
This year the recovery came sooner than anyone expected. A lot of things could have happened in the middle of March. In that instant, it was easy to picture the crash getting worse. Instead, every market spent the second quarter of 2020 recovering from the lows.
Most of the global markets gradually drifted upwards from there. And markets grew more optimistic as the year went on. By the year’s end, the risk sat at the opposite end of the March crash. Getting rich quick has its draws and investors can get too caught up in the speculation. I came across this Ben Graham quote recently that offers some guidance, “In a speculative market, what counts is imagination and not analysis.” Be wary of stock prices drifting upwards on hopes and dreams.
Below you’ll find four tables. The first is a quarterly breakdown of total returns for global stock markets and U.S. sectors. That’s followed by a monthly breakdown of developed markets, emerging markets, and U.S. sectors. Here are a few highlights:
- The smoothing effect we get from annual returns hides the crazier moves in the market. 2020 is a great example of what investors endure to earn an average (indexed) return in the wildest of years.
- The number of double-digit swings from quarter to quarter should be eye-opening until you see the month to month swings. Now think back to the most volatile days last March. It’s a lesson in how quickly and unexpectedly markets can move in either direction. Now imagine trying to predict or time those swings. Good luck.
- Most people learn too late that the game within the game of investing is survival. The tables below sit as a reminder of the importance of avoiding losses. It’s a common mistake to see gains and losses equally but they’re not. A 30% loss followed by a 30% gain leaves you sitting at a 9% loss. So a 30% loss needs a 43% gain just to break even. Those needed gains to break even only grow as losses get bigger.
- The advantages of diversification are blatantly clear in the developed and emerging market tables below via the broader International (MSCI EAFE) and Emerging (MSCI EM) market indexes included in each. As Peter Bernstein said, “I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place.”
- Every year brings surprises. 2020 was no exception with the crash, quick recovery, and growing market optimism. Expect the unexpected and have a plan for your portfolio for when the next surprise pops up.
And on the lighter side:
- Every market fell in the first quarter of 2020. Broken down further, every market fell in March. All but one — China — fell in February.
- Every market rose in the second quarter of 2020. April saw every market rise.
- All but one market rose in the fourth quarter of 2020. Every market rose in November on news of the vaccine. All but three rose in December.
- The South Korea and Denmark stock markets crushed it. Both even outperformed the U.S. Tech sector.
- The Danish stock market has been crushing it since 2007 — 12.2% annual total return. That’s better than the S&P 500 over the same period.
- The U.S. Energy sector can’t seem to catch a break. It experienced losses in 8 of the 12 months, down 34% on the year. It’s had a lost decade and a half –less than a 1% — that’s 0.86% to be exact — annual total return since 2007! That’s worse than short-term Treasury bills.
- The Financial sector hasn’t done much better. At a 3.1% annual total return since 2007, that’s worse than a U.S. Aggregate bond index fund.
Click the tables below to enlarge.
- Farewell. A Reflective Note from the Author on 40 Years in the Industry – Man Institute
- A Simple 2×2 For Choices – S. Godin
- Stocks Are Allowed To Be Expensive Since Bonds Yields Are Low…Right? – M. Faber
- The Case Against Value Stocks – ValIdea
- Factor Olympics 2020 – Factor Research
- Why Rookie CEOs Outperform – HBR
- Bill Gurley and Howard Marks: What to Look Forward to in 2021? (podcast) – 20VC
- Morningstar’s Influence on Style Returns – Klement on Investing
- The Lost History of Yellowstone – Smithsonian