2020’s Thrilling Financial Ride

Market moves prove once again to be wildly unpredictable.

2020 was a year best described by Dickens: It was the best of times; it was the worst of times.

Pretty much the worst of times for the economy and our social lives, but close to the best of times for most financial markets.

Let me start with the ending and then walk you through this volatile year.

As of Dec. 29, 2020, market returns were as follows, as measured by the total returns (including dividends) of the largest ETFs in each asset class.

Only REITs suffered a loss, though it was mild, considering that brick-and-mortar retailing and even office spaces are likely to have lower demand well after COVID-19 is history. I previously offered two explanations of why stocks surged while the economy tanked.

But, as you can see from the chart below, it was a wild ride.

Bull, Bear, Bull

We entered 2020 with the longest-running bull market in history. The year started out quite nicely, with relatively low volatility. But then “corona” started meaning something different than a beer I drank with a lime.

In the 33 days between Feb. 19 and March 23, U.S. stocks dropped by 35%. The bull was stopped dead in its tracks.  A bear was born!

Not a single asset class seemed to work. Even high quality bond funds failed us as bond market liquidity dried up. People who knew the phrase “this time is different” was costly and dangerous told me “this time really is different” and bailed on stocks.

My two brains (instincts and logic) were fighting it out. Though logic eventually won out and got me to rebalance in March, it was anything but easy.

Market Twists & Turns

I’m not sure anyone was predicting a recovery in 2020, much less a lightning-fast surge and a great year for investing. Once again, markets fooled us, as they regularly do. The faster we realize we can’t predict markets, the better our returns are likely to be.

Precious metal equities were quickest to recover, surging more than 50% earlier in the year, before giving back some returns. The volatility of the VanEck Vectors Gold Miners ETF (GDX) continued to make stock index funds look boring and, of course, money poured into the fund right about at its height. Though markets aren’t predictable, investors are predictably irrational.

GDX vs SPY

REITs, which ended the year down, gained back the majority of the losses. International stocks once more lagged U.S. stocks as growth drove markets yet again, and international stocks had a far greater value tilt.

Those who had been predicting a bond bubble again proved to be dead wrong. In spite of record deficits and printing more money than ever before, interest rates plunged to the point that real (inflation-adjusted) returns are likely to be negative if the Federal Reserve hits its 2% inflation target. The bond bull turned 39 years old in 2020.

Looking Back At Our Wild Ride

While 2020 was likely the shortest bear market in history, it doesn’t mean the next one will be short. In Japan, for instance, stocks are lower today than when they peaked in 1989.

For many, March is a distant memory, and they again think they can take on a ton of risk. If 2020 taught us anything, it’s that bull markets can happen simultaneously with awful economic news. It stands to reason that bear markets can happen when least expected, and simultaneously with great economic news.

Buckle up—2021 is likely to be wild as well. Make sure you have a portfolio you can live with and can rebalance both in good times and bad.

Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.