We Can See the Future…Sort of.
In our 2019 Year in Review published on Jan. 17th, 2020, which you can read here, we wrote the following:
“…There will be another recession – that part is truthful. Wait! Stay with us. The key difference is no one knows when it is going to happen, how long it could last, or what the impact will be. It could be tomorrow, next month, 3 years from now. It could last a month, or it could last 2 years. Markets could fall 5%, or 40% before leveling off…You get the idea – it can’t be predicted. So, what does all that mean to you?”
At the time of writing, the virus spreading in the Chinese city of Wuhan was just a news headline that seemed so far removed from our own lives here in Canada that it was hard to understand how its impact would be felt globally. 34 days after publishing the article, Canadian stock markets – finally beginning to quantify the broader consequences of C19 – started a sharp and steady downhill march. This tailspin would last a painful 32 days, over which time the S&P/TSX composite would decline 37%1. It wasn’t the 40% we referenced in our 2019 review, but it was pretty darn close. Other stock markets met a similar fate; the Russell 3000, which represents the entire US stock market, fell 35%2 and the FTSE Developed excluding North America Index, an index of international stocks, declined over 32%3. Global stock markets were well and truly in bear market territory.
Highs and Lows – Performance of MSCI All Country World Index
Source: Dimensional.com
When we wrote our 2019 review, did we know something the rest of the world didn’t? No. No direct line to the Chinese Government, psychic abilities or Danielson Group staff moonlighting as virologists. Admittingly, a pandemic wasn’t necessarily our top pick for cause of the next recession… in fact it may not have cracked our top 5. We wrote it because we know that – whether caused by normal market cycles or an exogenous shock of some kind – recessions are neither unusual nor unexpected. We’ve been here before. We’ll be here again. When will it be and what will it look like? We certainly don’t know… and you should be wary of anyone who claims that they do.
Owning the Winners and Losers
The 2020 economy and market also underscored the importance of staying broadly diversified across companies and industries. The downturn in stocks impacted some segments of the market more than others in ways that were consistent with the impact of the COVID-19 pandemic on certain types of businesses or industries. For example, airline, hospitality, and retail industries tended to suffer disproportionately with people around the world staying at home, whereas companies in communications, online shopping, and technology emerged as relative winners during the crisis. However, predicting at the beginning of 2020 exactly how this might play out would likely have proved challenging.
In the end, the economic turmoil inflicted great hardship on some firms while creating economic and social conditions that provided growth opportunities for other companies. In any market, there will be winners and losers—and investors have historically been well served by owning a broad range of companies rather than trying to pick who will come out on top.
Fight or Flight
“The stock market is a device for transferring money from the impatient to the patient.”
~ Warren Buffet
It’s not lost on us that we’re often guilty of sounding like a broken record in our messaging. We do our best to dress it up in different outfits and sometimes we impress ourselves by burying them in analogies, but why the repetition? Because having a successful investment experience isn’t rocket science, it’s about sticking to a core set of principles. Principles that are worth repeating over and over again. One of the principles we never get tired of talking about is the importance of staying disciplined and maintaining a long-term perspective, no matter how bumpy the ride can feel at times. So how did the collective average fair through 2020?
Different Crisis, Same Story – Global Equity Returns vs. People Going to Cash
Source: Dimensional.com
What you’re looking at here is the global equity returns, which are represented by the bar chart, and the money market flows, depicted by the thin blue line. The question this graph is trying to answer is: what did people do with their money as equity markets took a dive? As you can see by the line showing movements into cash, emotions took over when things went sideways. People sold their stocks and bonds and in the process broke the cardinal rule when encountering a bear in capital markets – they turned tail and ran. In doing so, losses were crystalized, opportunities for recovery were missed, and now they’re left with the difficult decision of when to get back in.
As we move into 2021, many questions remain about the pandemic, new vaccines, business activity, changes in how people work and socialize, and the direction of global markets. Yet in 2020, the markets continued to function and that people adapt to difficult circumstances despite the economic and market turbulence. The year’s positive equity and fixed income returns remind that, with a solid investment approach and a commitment to staying the course, investors can focus on building long-term wealth, even in challenging times.
Sincerely,
Danielson Group Wealth Management
