Here are the charts and themes that tell the story of 2020…
I. The World Before Covid
It’s hard to remember, but there was a time when where no one was talking about Covid-19.
2020 started off the same way 2019 ended: with record highs across the board.
The only nagging concern was the ongoing “trade war” that was soon alleviated with a “phase one deal” and more all-time highs.
By early February, this is where things stood…
But only a month later, everything had changed. The entire world was talking about the same thing: Covid-19.
When was the last time the entire world was talking about the same thing for this long?
— Charlie Bilello (@charliebilello) March 12, 2020
Not since 9/11 and World War II prior to that had a single issue dominated the conversation in each and every household.
And every single day, the news seemed to get worse, with reported cases rising, deaths increasing, and the US preparing the join the rest of the world on lockdown.
On March 16, the Volatility Index ($VIX) closed at its highest level ever, surpassing the prior high from 2008.
The Dow fell nearly 13% that day, its 3rd largest decline ever.
Markets around the world were crashing, with the fastest bear market in history registered on March 12 (>20% drop from S&P 500’s all-time high on February 19).
This brought to an end the 2nd longest run without a 20% drawdown ever…
By March 23, the S&P 500 was down over 35% from its February high, with no end in sight.
The longest economic expansion in US history had ended, millions of Americans were losing their jobs, and nearly every state in the US was locking down.
The “next Great Depression” seemed to be a foregone conclusion and all hope was lost – or so it seemed.
But there are no foregone conclusions in markets because the future is not limited to what has happened in the past.
There is no better example of this than 2020.
During the 2001 and 2008, Tech stocks (Nasdaq 100) would fall 33% and 42% respectively.
The economy was in recession both years, and recessions typically hit corporate profits, including technology companies.
But in 2020, we saw a recession unlike any we had ever seen before.
With the government mandating businesses to shut down, schools to close and paying people to stay home, many technology companies benefited as their products instantly became more valuable and essential…
- Can’t go to the store? Buy more online (Amazon, Etsy, Shopify)
- Can’t leave your house? Order a new streaming service (Netflix, Amazon Prime Video, Apple TV+, Disney+)
- Can’t go to the Gym? Exercise at home (Peloton).
- Can’t go to the office or school? Use video conferencing (Zoom, Google Meet, Microsoft Teams).
- Can’t meet up with friends/family in person? Spend more time on social media (Facebook, Snapchat, Twitter, Spotify).
From the cloud (Amazon AWS, Microsoft Azure, Google Cloud, Oracle, Salesforce) to the classroom (Google Search/Classroom, Canvas, Chegg, etc.), there seemed to be countless examples of technology companies providing solutions to the stay-at-home economy. In almost all cases, these were secular trends in place at the start of 2020 that only accelerated with the advent of Covid-19.
So the narrative quickly shifted from cataclysm to cheering: “this recession is the best thing that ever happened to Tech.” In turn, the Nasdaq 100 surged higher, with a new all-time high by early June.
The broader market would follow suit. The fastest bear market in history would also become the shortest, at only 33 days.
From its March 23 low, the S&P 500 would never look back, rallying 55% to hit new highs in August.
As for the economy, there was another first in 2020. Instead of a second Great Depression we saw the shortest recession in history at 2 months in duration (March and April).
It would be the first recession ever in which incomes rose, boosted by record government stimulus payments and unemployment benefits that paid a majority of recipients more than they were working.
By June, Retail Sales had recovered in v-shaped fashion, proving that if you give the US consumer free money, they will spend it.
Speaking of free money, where did it all come from?
We borrowed it, of course, sending National Debt to new heights, ending the year at over $27.5 trillion.
As a percentage of economic output (GDP), national debt went vertical after increasing for much of the past 40 years.
Who was buying all of that new debt, and at a interest rate lower than ever before?
Enter the US Federal Reserve, who pushed their powers to new limits.
After emergency rate cuts back to 0% in March, they quickly embarked on the most aggressive balance sheet expansion in history.
By the end of the year, the Fed had bought more than $3 trillion in new assets (including high yield bonds), with promises to continue buying at least $120 billion/month going forward.
The profligate actions of the Federal Government and the Federal Reserve became a walking billboard for Bitcoin.
Market participants came to the realization that the less the powers that be cared about the value of the dollar, the less that dollar is worth.
The narrative in support of a decentralized alternative to fiat currency had never been stronger.
As such, Bitcoin went vertical, ending the year more than 4x higher than where it started.
VI. IPO Fever
Bitcoin wasn’t the only thing that was booming, as investor risk appetite became insatiable.
Enter supply, with new issuance of IPOs in the US surpassing the previous record from 1999 by a wide margin.
SPACs were all the rage, with $82 billion in capital raised, more than 6 times higher than 2019.
Demand for new IPO shares outpaced supply, with 1st day gains (vs. offering price) at their highest levels since 2000.
Few companies captured the imagination of investors more than Snowflake ($SNOW), which on December 8 rose to a market cap of over $120 billion and a price to sales ratio of 245x.
By my research, this was the most highly valued large cap company in history.
IV. Pandemic + Recession = Multiple Expansion?
Speaking of valuations, with earnings declining over 20% in 2020 and stock prices rising, the S&P 500 ended the year with a P/E ratio of 31, its highest year-end multiple in history.
Investors today are clearly anticipating much brighter days ahead, with the vaccines bringing an end to the pandemic and a v-shaped recovery in the economy and earnings.
VII. No Country for Old Yields
They are also anticipating a continuation of the record low interest rates that are said to justify higher multiples.
In 2020, we saw all-time yield lows across the entire bond market, including a…
- 10-Year Treasury Yield low of 0.52%.
- Investment Grade Bond Yield low of 1.79%.
- High Yield Bond Yield low of 4.33%.
- 30-Year and 15-Year Mortgage Rate low of 2.66% and 2.19%.
VIII. Fat Tails and Expecting the Unexpected
Speaking of record lows, what we saw in the Crude Oil market during April was one for the ages.
We learned once more that financial markets do not follow a bell curve. Instead, they operate in the world of fat tails, where extreme events are much more likely to occur than a normal (or Gaussian) distribution would predict.
This is what the history of Crude Oil looked like at the end of 2019…
And this is what it looks like today…
Notice something different about that picture?
You got it: negative prices.
Crude Oil futures actually turned negative in April for a brief moment as the world was awash with supply and demand had collapsed. What that meant was traders were actually paying others to take delivery of their Oil because there was nowhere to store it.
Using statistical forecasting based on all prior data, this should never have happened even once in the history of the universe. But it did, and given enough time, it will happen again.
IX. Triumph of the Optimists
Speaking of unexpected outcomes, we left 2020 similar to the way we started it, with stock prices at all-time highs, home prices at all-time highs, and an easy money policy at the Fed.
Government stimulus (and the promise of more of it) ended up being the gift that kept on giving. Each time there was any hint of “progress” on the next bill, stocks would surge higher. The same was true of the Federal Reserve, who reiterated time and again its promise to remain easy for many years with a higher tolerance for inflation.
But most important of all was the miracle of the vaccines, both in terms of their timing (well ahead of the most optimistic expectations) and efficacy (much higher than expected). For three weeks in row in November we received reports of the successes of Pfizer, Moderna, and AstraZeneca – a testament to human grit and ingenuity like none other.
The S&P 500 would finish the year at an all-time high, up 18.4% (total return).
At a level of 3756, it ended the year above every single Wall Street forecast in spite of a global pandemic, the largest quarterly economic contraction ever (-31% in Q2), and the highest intra-year Unemployment Rate (14.7%) since the Great Depression.
The rising tide would lift most asset classes, with only Commodities and REITs finishing lower.
For the second year in a row, the US Tech sector ($XLK) led the way (+44%). Combined with the 50% gain in 2019, this was the best 2-year performance for Tech stocks since 1998-1999.
The broader Nasdaq 100 Index extended its streak of annual gains to 12, a new record. As for the stay-at-home recession, it did indeed prove to be the best thing that could have happened to big tech, the polar opposite outcome to 2008…
No company contributed more to the Nasdaq 100’s gains than Apple ($AAPL), whose stock rose over 82% on the year and whose market cap surpassed $2 trillion.
Apple may have been the largest contributor, but the story stock of 2020 was most definitely Tesla ($TSLA).
With a 743% gain, its market cap ballooned to $668 billion from $75 billion at the start of the year. Its price to sales ratio rose from 3 to 25 as investor expectations for the future of the company went parabolic. Whether Tesla can grow into such a multiple will be one of the most interesting questions for 2021 and beyond.
Tesla would become the 6th largest company in the US at year end, besting every other stock in the S&P 500 by a wide margin.
While the winners outnumbered the losers, many companies still felt tremendous pain. Cruise lines, Airlines, Energy, and Commercial Real Estate stocks were all hit hard (though well above their lows for the year).
A majority of country ETFs finished positive (avg return: +3.6%) in 2020, with US shares outperforming once again.
Considering the shock to global growth rates, these positive equity outcomes were nothing short of incredible.
The US bond market had another strong year with a total return of 7.5%.
All segments of the fixed income space would finish higher, benefiting from the unprecedented wave of central bank easing around the world (central banks cut rates 256 times in 2020).
Home prices in the US continued to hit new record highs, accelerating higher with stimulus measures and ultra-low mortgage rates creating a veritable boom in activity.
Commodities fared well for the most part with Lumber and Silver leading the way higher. Energy-related commodities suffered, however, as the collapse in demand due to covid was too great.
While most assets did well, there can be only one King, and in 2020 the crown goes to Bitcoin.
The TL;DR recap of 2020…
- Global Pandemic: ignored, feared, then ignored again
- Economy: shortest recession in history, growing again
- Stocks: shortest bear market in history, all-time highs again
- Bond yields: Fed buying like mad, all-time lows
- Housing prices: boom in activity, all-time highs
- Commodities: mostly higher with exception of energy
- Central Banks: easy as they’ve ever been
- Bitcoin: vertical, all-time highs again
In a year filled with unprecedented challenges, sadness and heartache for many, it was a triumph of the optimists once more.
XIII. Happy New Year
These were the charts and themes that told the story of 2020. As always, the narratives followed prices.
As prices change in 2021, the narratives will change as well.
- Where will the S&P 500 end 2021?
- How about the 10-Year Yield?
- Where is Crude Oil headed?
- Is Gold or Bitcoin a better investment here?
- How long will the Fed hold rates at 0%?
- Is there another recession coming soon?
I don’t know the answer to any of these questions.
As Lao Tzu said, “those who have knowledge don’t predict. Those who do predict don’t have knowledge.”
What’s the alternative?
Weigh the evidence as it comes, invest based on probabilities, be forever humble and thankful, and leave the predictions to those whose job it is to entertain. That’s the best you can do in this fickle business of investing – try to find the right path for you and stick with it long enough to reap the enormous benefits of compounding.
In 2021, I predict one thing and one thing only: you will see many more surprises. That is the nature of markets.
I wish you all a happy, healthy, prosperous and fulfilling 2021.
If we can help guide you on your path, reach out.
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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.
