2020 was an unexpected year, to say the least. The Covid-19 pandemic wreaked havoc on people’s lives, with surging infection rates, lockdowns, loss of livelihoods and an unfortunately high death toll. Needless to say, it resulted in huge volatility in the financial markets as well. In particular, the heightened days of February to March 2020, when the global markets plunged steeply.
The rapid spread of the virus, declining oil prices and the fear of impending recession, sent investors into risk-averse territory. The Dow lost almost 37% of its value between February 12 and March 24, 2020. To deal with the crisis, central banks slashed their interest rates and the US government injected massive stimulus, resulting in depreciation of the mighty US dollar.
However, the market crash in early 2020 was short-lived. In April, the global markets re-entered a bull phase with a vengeance. By August, the S&P 500 was posting record highs and the Dow climbed over 30,000 points for the first time in history in November 2020. A roller-coaster year ended on a positive note with vaccine roll-outs, a new US President, a resolution to the drawn-out Brexit and the prospect of a new US fiscal stimulus bill.
The S&P 500 made a yearly gain of 16.26% in 2020, while the Nasdaq and DJIA gained 43.6% and 7.25%, respectively.
Investing Lessons to be Taken Forward in 2021
Overall, 2020 was immensely challenging but taught us, or rather reinforced, some time-tested investing lessons. Here are some lessons to take into investment portfolios moving forward in 2021.
Invest in Long Term Market Trends
One of the biggest takeaways from 2020 was the concept of market resilience. There were two distinct bull runs in the year, with a short-term bear market in between. The S&P 500 experienced its fastest ever bearish trend in 2020, although about 5 months after that the index achieved its third-fastest recovery to breakeven levels. With all the political instability in the US, a surge in infection cases and nearly 20 million people unemployed in a job crisis worse than the 2008 recession, the index was up 16.9% with a week left for 2020 to end.
This shows the importance of sticking to your investment plan and not falling prey to panic selling at the slightest hint of market declines. In 2020, investors who stayed in the markets for the long term and rode through the volatility in the hope that the market would reverse made calculated decisions that paid off.
Diversification is the Key to Stay the Course
It is always a good idea to not put all your eggs in one basket. The US dollar declined significantly in 2020. By September, it was down 11% against a basket of other currencies and near its lowest level in 27 months. Forecasting USD price moves accurately is important for investors, since its price direction affects everything from the price of gold and commodities to corporate earnings. But, against a backdrop of economic revival and ultra-low US interest rates, the world’s reserve currency continued to decline.
In the stock market, some specific market segments fared extremely well. Investors who traded consumer staples and technology stocks were able to offset some losses. Take Tesla for example, which was marked by scepticism as the year started, over its valuation and balance sheet. But, Tesla’s stock surged a whopping 695% in 2020, making it one of the most valuable companies worldwide at a valuation $630 billion. On the other hand, WTI Crude fell approximately 55% and emerging market stocks declined 15%.
Risk Management Should Never be Taken Lightly
In the past 20 years alone, we have witnessed the tech bubble collapse, the great recession of 2008, the European debt crisis of 2011 and the pandemic in 2020. The financial markets, therefore, remain unpredictable. The sudden onset of the pandemic led to the start of a bear market in February 2020, when the S&P 500 lost almost 34.9%
On the other hand, the markets rallied in the days leading up to the US presidential election, with the S&P 500 climbing 2.2% on November 4. This was when the country was bracing for protests the day after the elections, when no clear winner was indicated.
We are still grappling with the pandemic in 2021. Many European countries are going into extended lockdowns once again. Another market correction could very well be on the cards. Also, the markets could well continue to go downhill, longer than expected. The importance of risk management tools, therefore, cannot be overemphasised.
Pay Attention to the Fundamentals
One of the most evident reasons for the markets remaining largely buoyant in 2020 has been a highly dovish US Federal Reserve. The Fed recently made the pledge to keep interest rates down at near zero levels at least till 2023, and focus on unemployment rather than inflation. The longer end of the yield curve is not determined by the Fed, but short-term interest rates impact long-term inflation rates. Expectations of inflation are currently low. This makes investment in the US 30-year bonds less appealing than high quality stocks.
Similarly, a consistently rising euro is a cause for concern for the ECB, and could impact its monetary policy going forward. There are concerns regarding how the Eurozone will perform in 2021, given that the UK is no longer a part of the EU and a GDP drop of 7.3% has been predicted by the ECB. Traders need to pay close attention to economic and news releases to make informed decisions.
Going Forward into 2021
Market sentiment has been optimistic since the beginning of 2021, due to rapid vaccine roll-outs in developed and developing economies. Recently, the IMF revised its growth projections from 5.2% to 5.5% for 2021, on account of vaccine-related strengthening of the markets and further policy support from governments. Here are some forecasts for the year:
- The stock markets seem to have priced in control over the pandemic, a new US president coming to power and a stronger economy. However, this also suggests that lower than expected recovery could rattle investors and lead to sell-offs.
- Many analysts see a strong case for small cap stocks to benefit from economic expansion in 2021. These stocks tend to perform well in cyclical recoveries. The Russell 2000 soared more than 8% in December 2020, following an 18.3% rise in the previous month.
- The US dollar would likely continue to underperform. Being a safe-haven asset, it is likely to decline on the back of strong economic recovery outside the US and the lower interest rate regime. There are also concerns that further stimulus measures could inflating fiscal deficits.
- Market twists and turns are expected. Volatility will continue to stay alive, punishing investors who don’t exercise risk management strategies. However, this also means increased trading opportunities.
- The EU’s focus on convergence of performances of member states and the new trading relationship with the UK will spark interesting opportunities in the EUR/GBP and GBP/USD forex pairs. Volatility in the GBP/USD pair especially could provide plenty of trading opportunities.
Moreover, the pandemic has taught us the importance of paying attention to our health and staying in touch with friends and family. As social distancing and remote working continues worldwide, the importance of maintaining social ties, even if via technology is paramount.
This information is not intended as financial or investment advice and the company will not accept any liability in this respect.
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