Most will be very happy to turn the page on 2020. The punching and counter punching between COVID-19 and vaccine researchers added daily financial market volatility that fatigued even the heartiest investors. Those who remained disciplined during the tumultuous year may look back and see a financial silver lining in what was otherwise a very dark cloud of a year indeed. Despite a global pandemic and unprecedented domestic election uncertainty and distrust, major U.S. stock indexes finished the year near all-time highs, powered by low interest rates and multiple massive government stimulus packages.
The year, the pandemic, and markets’ behavior again proved that “investing” is so much more than reacting to news and events. We’ve said many times here that stocks are discounting mechanisms – prices are determined by millions of investors racing to assimilate all available information about the future profits of individual operating companies. In rare instances, like the spring of 2020, markets are waylaid by unpredictable events (e.g. COVID-19, September 11th) and powerful broad-based selling becomes a short-term market crash. But as we saw yet again, investors quickly turn their focus from current circumstances to future operating fundamentals, and markets recovered as the timeline for a return to normalcy became clearer.
What We Know: These are things that have been resolved and validate recent gains and current stock prices.
- Multiple vaccines have been developed, approved, and are being administered.
- The election is behind us.
- The balance of power in Washington makes larger future economic stimulus more likely.
- The Fed will remain extremely supportive and accommodative for quite some time.
What We Know We Don’t Know: These are things that we know will impact markets but have not yet been determined.
- The degree to which the vaccine rollout is “successful”.
- The impact of ongoing government stimulus on deficits, inflation, and economic activity.
- Consumer behavior changed during the pandemic, and it is difficult to determine which behaviors have been permanently altered and which will return to “normal” when the economy is fully reopened.
- The extent and timing of any tax increases, which are more likely now.
What We Can’t Know: These are risks/uncertainties that are always present in investing.
- A vaccine-resistant variant of the virus could emerge.
- Any other unforeseen catastrophic event domestically or globally could materialize.
More than anything, the events of 2020 reminded us that investing requires discipline. There will always be uncertainties and complete unknowns. But there are also fundamentals in place now that support stock prices which seemingly detached from reality and levitated in the midst of a very difficult year for humanity. As the reopening broadens and populations are vaccinated, the future rationalization for current stock prices will likely materialize.
Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal. Diversification may not protect against market risk or loss of principal. The opinions expressed above should be construed as neither investment advice nor a solicitation to buy or sell securities. Actual investor results may vary.
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