2020 will end in less than a month, but it will be remembered for many years to come. I cannot think of a time when everyone was so happy to ring in a new year. We knew this year was going to be crazy, with a divisive presidential election and all, but to have combined the election with a global health pandemic and social unrest was something nobody could have ever predicted.
As we continue emerging from some of the most unsettling market months of our lifetime, the speed at which markets turn for better or worse has never been more evident. In an odd way, this year has felt like three years, where investors experienced one of the most volatile months in history this past March, followed by massive government intervention that helped markets recover over the next seven months, and then witnessing one of the craziest presidential elections in history with a second wave of COVID-19 infections. Can it get any crazier!?
As we enter a new year, there are still many unknowns investors must digest, including a second wave of coronavirus infections, an ongoing economic recession and a mind-boggling stock market that seems to have nine lives.
With those thoughts in mind, I have three wishes for 2021.
End to the Pandemic
This one is self-explanatory, and it is probably ranked number one on everyone’s wish list. The recent vaccine news from Pfizer and more recently, Moderna is very encouraging, but we still have a long way to go in making sure the government can take care of the logistics and plan for its distribution. The recent increase in infections is already leading some states to enforce restrictions on various activities such as discontinuing in-person classes, closing indoor dining at restaurants, etc. The market seems to be taking these restrictions in stride right now, but the longer this goes on, the more it will impact the economic recovery. If that happens, markets may reverse course and decline.
This one is a wild card, but I think it is possible, even with a potentially divided government. A Biden Administration will want to get started on the right foot and unite Washington. Let’s hope they succeed so all of them can get some things done for the benefit of the country. I know I might be overly optimistic here, but it’s a new year!
If political agreement can be obtained, a second stimulus package could be approved before year-end and help individuals and the economy through the first half of the year.
Nevertheless, whether a deal is passed or not, investors should refrain from making knee-jerk changes to their long-term investment portfolios because of political posturing and temporary dysfunction. Your investment plan is more important than who’s in office and keeping a laser focus on your specific goals and objectives, rather than the “political de jour of the day,” is what is going to help you achieve long-term success.
Broadening of Market Gains
The pandemic shutdown of our economy earlier this year rapidly brought forward the adoption of numerous technological innovations over the past twenty plus years including online shopping, video conferencing, and streaming services. The companies that have created these technologies have been big winners this year (think Amazon and Netflix) and one of the reasons why markets have performed so well.
It would be great to see their stocks continue to outperform, but I am not sure this can continue indefinitely. It would be healthier for markets to see a broadening of performance from other sectors such as financials, healthcare, energy, and consumer cyclicals.
It is important to see strength from areas outside technology, especially if we want to see a sustained rally in stocks. The S&P 500 Index, as an example, has performed well mostly due to about ten stocks, all in the technology sector. If you took away the strong performance of technology, the S&P 500 would be up less than half its current percentage, if not lower.
I believe strongly in building globally diversified investment portfolios for the long-term. Relying on only one part of the market carries risks because when that sector underperforms, and history shows that it will, your portfolio could be harmed. If you have exposure to other parts of the market, including international investments and bonds, then you help insulate, to some degree, your portfolio to those risks.
In the 25 years of being in the financial advisory business, I have developed a healthy respect for the short-term unpredictability of financial markets, the economy, and Washington D.C. So, as we enter the new year with a lot on our minds, let us be thankful for the great people in our lives, and hope some or all my wishes come true!