“Hey, Hey, Hey, Goodbye” – Steam
Jim Shellenberger, CFA | Financial Advisor
If you have watched Remember the Titans, this song is quite memorable. It is a good representation of many people’s view of 2020 as we enter 2021. We know that a new year won’t magically change everything, but it represents a fresh start. If you are like me, you are also tired of hearing about 2020. However, I know personally, many great moments came from this year, and I hope the same for you. With the start of a new year, I would like to take this month to look back at the U.S. stock market and economy.
1. 2020 was arguably the fastest market recovery in the last few decades.Source: Morningstar
This chart shows the last three recessions (2000, 2008, and 2020) and the S&P 500® Index path from the previous high and how many days it took to get back to the previous high. We can see that 2020 has been exponentially shorter than the other two. It took the S&P 500 about 1,500 days from the top to the bottom and back to the top in 2000. That is a little over four years. You can also see that 2020 did not have as large a drawdown as the other two. The top two theories as to why that could have been was that the Federal Reserve and government stepped in quickly and in a big way, or markets figured this was temporary and that we would get back to normal at some point. Realistically, the answer probably lies with a combination of those two thoughts.
2. The Federal Reserve helped the market.
This graph shows the Federal Reserve’s total assets, and we can see how it almost doubled in 2020. When the Federal Reserve’s total assets increase, they buy assets and inject money into the economy. This was beneficial as there was worry about bond liquidity in March and with the Fed stepping in, they helped assure that there was the liquidity needed for the bond market. They shifted their focus to making sure the markets acted as close to “normal” as they could. Also, the stimulus package helped businesses, individuals, and unemployment. Arguably the combination of the two helped ease people’s minds and support capital markets so the decline wasn’t as severe as it could have been.
3. The Federal Reserve also lowered its target rate.
Another beneficial move by the Federal Reserve was to lower the target interest rate. You may have noticed this with your bank account, as you probably saw your yield change to almost zero. No one likes to see their bank account yield zero, but theoretically, it helps businesses. When interest rates are lower, companies should be able to borrow at lower rates, which is beneficial for growth. When the Federal Reserve said they were lowering their target rates and would target to keep them there for the next couple of years, businesses and investors seemed to react favorably.
4. Unemployment scared everyone at first but has quickly made its way back down.
When things first closed, unemployment shot up at a record pace, which frightened almost everyone. As things started to open back up and with the stimulus package’s help, unemployment started coming back down. It is still not where it was before, but lower is better. It will be interesting to see how this progresses as businesses hopefully continue to reopen.
5. Not only did US large stocks make an incredible comeback, but so did US small stocks.
The chart shows US small stocks represented by the Russell 2000 Index. You can see compared to the S&P 500 Index (US large stocks) they had a larger drawdown at the beginning of the pandemic. They kept par with US large stocks and then made some significant gains in relation to US large stocks at the start of November.
6. Frontier had relatively fewer equities in our strategies during 2020.
The light blue line is the movement of the S&P 500 since 2018, and the dark blue line is the earnings per share of the S&P 500®. Typically, you would see the S&P 500 move in relation to earnings. You can see throughout the years; they generally follow the same path. However, in 2020, there was a divergence between the S&P 500 price and earnings. Earnings tell you how healthy a company is. When earnings decrease and the price of the S&P 500 increases you would say the S&P 500® is getting more “expensive” because earnings do not support the price level. According to Factset, the one year change in earnings since Q3 2020 is -15.8% while the S&P 500 price went up 15.15% during that time period. Even though this is one of the many factors Frontier looks at, it is partly why Frontier did not hold as many equities last year as we may have historically.
2020 provided many more interesting facts to present, but I don’t want to take too much of your time. The key takeaways are that this recession has had one of the fastest recoveries in history. Much of the credit is likely due to the Federal Reserve and US government. Economic numbers have started to recover and are looking more manageable. We still are not to the end of this as COVID-19 is still here and affecting businesses and individuals. During all of this, Frontier has stayed true to our downside first focus. We have continued to look at the fundamentals when putting together our strategies. Frontier looks at 16 asset classes and strives to take out the emotion and look at the fundamentals when evaluating changes. And we do this all while keeping a Downside First Focus in mind to get as much return as possible. If you have any questions about anything discussed here, about 2020, or Frontier’s process, please don’t hesitate to reach out.
 Butters, John. “Earnings Insight.” Factset, 4Dec.2020,www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_120420.pdf.
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|S&P 500®||Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ|
|Russell 2000||Measures the performance of the small-cap segment of the U.S. equity universe|