Key Questions: What Did We Learn in 2020?
Despite a challenging 2020, it is worth reflecting on important lessons learned from a most demanding and unsettling year.
As we look back on the year that just ended, we recall our first reactions to news reports that a novel coronavirus was beginning to spread. At the time, we noted that volatile financial markets would be the likely result given a multitude of considerable uncertainties. Little did we realize just how volatile markets would become.
After reaching a new all-time high in February, equity markets experienced their most rapid decline after attaining a peak. Credit, foreign exchange, and derivatives markets behaved in ways that were reminiscent of the Global Financial Crisis (GFC); this time, however, the intensity was distributed over mere days versus months. And key economic readings such as the US unemployment rate deteriorated to levels not seen since the Great Depression nearly 90 years ago.
Since the initial COVID shock, markets have fully recovered, investor fears have subsided (and arguably have been replaced with exuberance), and the economy has begun to heal, albeit gradually and somewhat unevenly.
Still, it is with sadness that we observe today that COVID cases continue to rise, and tragically so do related fatalities. Further, many of the world’s best infectious disease experts warn that grimmer milestones may still be yet to come.
Nonetheless, there is a light at the end of this very dark tunnel in the form of two approved vaccines that have demonstrated better-than-expected efficacy. And there’s the promise that others are likely to follow.
Of course, significant uncertainties persist, including the possibility of mutating strains and longer-term side effects. Moreover, challenges involving manufacturing, distribution, and administration are immense. To wit, a mid-December 2020 survey conducted by Gallup suggested that roughly one-third of Americans said they would be unwilling to take a vaccine.
In short, it would be naïve to conclude that everything will move smoothly in the future; setbacks are almost inevitable. Despite these challenges, however, it is worth reflecting on essential lessons learned from a most demanding and unsettling year.
Don’t Fight the Fed
As market reverberations intensified in mid-March, the Federal Reserve (Fed) acted swiftly and boldly by pledging to use its unlimited balance sheet, providing critical liquidity at a time when most all other market participants were clamoring for it. While employing similar tactics to those used during the GFC, the Fed acted much faster and more forcefully in 2020 and ultimately succeeded in forestalling a financial crisis. Risk markets have performed strongly ever since. In general, therefore, investors should follow the Fed’s words and position their portfolios accordingly.
Don’t Bet Against Human Ingenuity
Faced with social distancing requirements and devoid of most mid-to-large sized in-person gatherings such as religious ceremonies, sporting events, concerts, or even dining out, feelings of isolation and loneliness have unhappily become commonplace. Further, it is no surprise that some have reported a sense of despondency amid a dismal drumbeat of sobering COVID statistics such as those referenced earlier.
Yet, we shouldn’t abandon hope given the development of vaccines in record time to attack COVID-19 and the prospects for further advances. This response is a staggering achievement and a keen reminder that innovation and ingenuity have a long track record of success. And while investors must prepare to endure bouts of volatility as human ingenuity is not always linear, they would be ill-advised to bet against it.
Change is Accelerating
In the same vein as not betting against innovation, COVID-19 is hastening several influential trends. Growth in areas such as e-commerce, cashless transfer of payments, telecommuting, and telemedicine were all well underway pre-COVID. But all have accelerated in the past year, and investors should be looking for new trends and innovations and embrace the acceleration of societal change.
Sometimes Doing Nothing Is Better Than Doing Something, Provided You Have a Plan
On top of a global pandemic, 2020 also included one of the most contentious elections in our country’s history. As pundits prophesied varied outcomes in the months and weeks before Election Day, many investors grew nervous over the possibility of another crack in the market. And indeed, the S&P 500 Index slid roughly 5% in the week before the election.
But those who stood pat and maintained a longer-term perspective were rewarded as equity markets in November posted one of their best months in history. Such a response conformed with our repeated refrain that markets generally don’t care which candidate or which party wins the election. Instead, markets are most concerned with the lifting of uncertainty involving an election’s outcome. It also supported our view that, on many occasions, sometimes doing nothing is better than doing something.
Patience, Empathy, and Consideration of Others Are on the Rise
Finally, one of the more unique aspects of the response to the pandemic is that so many of us now "live at work," thereby providing a small glimpse into how our clients, colleagues, and partners live their daily lives. This is especially so now that they’ve transformed their spare bedroom or basement into a makeshift office.
With this, a new level of empathy has seemingly transpired. Some meetings are less formal, schedules are less rigid, and people generally appear more tolerant. I believe these elements will endure after the pandemic, along with renewed commitments for approaching life with greater purpose and more intentionality, more patience, and greater consideration for others. This new level of empathy may be the most noteworthy of silver linings of 2020.
I hope I’m right, and I hope everyone reading this shares a healthy and fulfilling 2021.
For more information, please contact your Key Private Bank Advisor.