13 Months
The last 13 months were like nothing I have ever seen.
To remind you of the journey we have traveled together, here are excerpts from my articles in our 2020 newsletters.
First Quarter Newsletter / March 31, 2020
COVID-19. A word I never heard of until five weeks ago. Now it’s everywhere — a microscopic organism that destroyed nearly $15 Trillion in global stock market wealth in just over a month. In 34 years of investing and managing through some of the worst bear markets in history (i.e., 1987, 1998, 2000 & 2008), I have never seen anything like this.
Bear markets are usually caused by financial fundamentals becoming extreme and out of synch. This bear was caused by a tiny virus, media hype and distortions. That led to uncertainty, followed by extreme fear, and then finally panic. The damage to the financial markets is far worse than the damage from the virus itself.
On Feb. 19, 2020, the Dow Industrials hit a new high of 29,348. Consumer sentiment was at an all-time high. The economy was hitting on all cylinders, and unemployment was at an all-time low. Workers in all economic classes were experiencing the best economy of their lifetimes.
On March 23, just 33 days later, the Dow Industrials had fallen 10,757 points, or 37%, to 18,591. This was the fastest decline in history, with the second, third, and fourth fastest being in 1934, 1931 and 1929, respectively. From March 12-19, the VIX, which measures volatility, was stuck at extreme, unprecedented levels between 75 and 85.
After the Dow initially dropped 37% in 33 days, the markets partially recovered and ended down about 20% at the end of the quarter.
This decline literally came out of nowhere and certainly qualifies as a black swan event. Its speed and depth were unprecedented. To find a decline this fast you have to go back to the Great Depression.
Second Quarter Newsletter / June 30, 2020
2020 has been an extraordinary year. First, we started out with an incredibly strong economy. Then out of nowhere, a microscopic virus shows up. Some politicians — along with selective epidemiologists and most of the media — put out death projections that turned out to be wrong by a factor of 10 to 30 times. Ultimately, the media went nuts and pushed a narrative that scared people out of their minds.
Through all of this, the scientists in charge came out with constantly changing, polar opposite recommendations on how people should stay safe. Next, various governors put out executive orders to shut down their economies that appeared to be directly tied to their political persuasion. All in all? A giant mess.
The most recent quarter ended with the markets snapping back 20%. After all of the drama, the S&P 500 is down just over 3% through June 30, 2020.
How is this even possible with everything so negative? Maybe things aren’t as bad as we were told. The markets do not seem to share the same fears pushed by the media.
So far, the market is doing exactly what the “experts” said it would not. It didn’t just post a V recovery. It actually posted the strongest post-waterfall rally in recorded history. Why does anyone listen to these naysayers?
Third Quarter Newsletter / September 30, 2020
2020 is the gift that keeps on giving. The insanity of Covid, the riots in the streets, and a very politically divided country have created one of the most unpredictable election years we’ve ever seen. The stock market, all the while, is going up and seems to be doing its own thing — regardless of what’s in the news.
For further perspective, consider that after all the volatility, the Dow Industrials is flat for the year and the S&P 500 is up about 5.5%. So far, this has been a textbook case of why you shouldn’t sell out when the market goes down.
The economic outlook is difficult to forecast. We have a recession that was caused by Covid-19. That part is simple. The difficulty is how long it will take us to recover.
Without solid facts, it’s tough to evaluate what’s really going on. For example, can we believe any of the data put out? Minor details such as why are the actual death rates 10 times less than the original projections? Why and how are politics involved in a pandemic? Why are some states with better numbers shutting down their economies while others are staying open? Cases are increasing, which is concerning, but deaths are declining. What are the real numbers of people who have died directly as a result of Covid? These questions are just the tip of the iceberg, but when you dig into them, none of it makes sense.
Covid-19 caused the recession. As long as Covid-19 is a concern, certain parts of the economy will be hobbled. Until we get more clarity on what the facts are, with actual numbers and cures, Covid-19 will continue to be a drag on economic growth.
Fourth Quarter Newsletter / December 31, 2020
After managing money for 30-plus years, I thought I had seen it all. 2020 was different.
Almost every media source I follow proclaimed it was the end of the world. Some even went as far as to guarantee this was the beginning of a depression — perhaps even equal to 1929.
So what does this have to do with investing?
Inaccurate information can destroy you when it comes to investing. Media forecasts usually do more harm than good. During the March meltdown, every single person I saw on CNBC claimed, almost with religious fervor, that this would NOT be a V-shaped recovery. In retrospect, their predictions were completely wrong. If you followed their advice, you lost a lot of money.
The amazing thing is that those pundits and forecasters are all still there. They are still full of advice. They still have zero accountability. It is amazing how they can do this year after year — and even more amazing is that people continue to listen to them.
To successfully invest you must sift through facts and fiction. You must invest based on reality. In our case, we build quantitative models that eliminate much of the noise and opinions and distill the market down to the numbers of what is actually happening. Then we follow those numbers.
Opposite to what the media proclaimed, the major market indexes reversed course right after their initial 30-day plunge. On the year, the Dow Industrials gained 9.6% and the S&P 500 was up 18.4%. What had been “the end of the world situation” turned out just fine. I never heard any retractions from the media.
In Summary:
I hope you enjoyed our trip down memory lane. While 2021 will likely bring more surprises, so far this year we have seen a transition from the growth stocks (that worked well for us last year) over to small caps, value, and energy. This year we will keep an eye on stock valuations, rising rates, inflation potential and of course Covid continuation.
There never seems to be a shortage of things to be concerned about. We are glad you made it through 2020 with us and we look forward to serving you in the future!