Once in a great while, there comes a year in the economy and the markets that serves as a tutorial for the principles of successful long-term, goal-focused investing. Two thousand twenty was just such a year.
On December 31, 2019, the S&P 500 stock index closed at 3,230.78. This past New Year’s Eve, it closed at 3,756.07, some 16.26% higher. With reinvested dividends, the total return of the S&P 500 was +18.4%.
From these facts, you might conclude that the equity market had a good year. And you would be right. What should be instructive to the long-term investor is how it got there.
From a new all-time high on February 19, the market reacted to the onset of the greatest public health crisis in a century by going down roughly a third in five weeks. The Federal Reserve and Congress responded with massive intervention, the economy learned to work around the lockdowns, and the S&P 500 fully recovered by mid-August.
The lifetime lesson here is: At their most dramatic turning points, the economy can’t be forecast, and the market cannot be timed. Instead, having a long-term plan and sticking to it—acting as opposed to reacting—once again demonstrated its enduring value. Waiting for a “pullback” once a market recovery gets under way, and/or waiting for the economic picture to clear before investing, turned out to be formulas for significant underperformance in 2020.
The American economy, and its leading companies, continued to demonstrate their fundamental resilience through the balance of the year, such that all three major stock indexes reached multiple new highs. And despite headwinds caused by the coronavirus pandemic and subsequent lockdowns, companies in the S&P 500 paid out a dividend of $58.28 per share in 2020, surpassing the 2019 record of $58.24 and setting the ninth consecutive annual record.
Meanwhile, at least two vaccines were developed and approved in record time and were going into distribution as 2020 came to an end. There seems to be hope that the most vulnerable population groups could receive vaccines by spring, and that everyone who wants to be vaccinated can do so by year-end, if not sooner.
The second lifetime lesson of 2020 had to do with the presidential election cycle. To say that it was the most partisan in living memory would not adequately express it. Supporters of both candidates were genuinely convinced that the other would, if elected/reelected, result in the end of American democracy. For investors who exited the market in anticipation of the election, they were surprised only to realize the enduring historical lesson which is: Never get your politics mixed up with your investment policy.
As we begin 2021, there remains more than enough uncertainty to go around. Is it possible that the economic recovery has been largely discounted in soaring stock prices, especially those of the largest growth companies? If so, perhaps the coming year could be lackluster or even a declining year for the equity market?
Yes, it’s possible. But how do we, as long-term, goal-focused investors, make investment policy out of that possibility? Our answer: We don’t, because one can’t. Our strategy, as the new year dawns, is driven by the same steadfast principles as it has always been. It is goal-focused and planning-driven, as sharply distinguished from an approach that is market-focused and current-events-driven.
The Federal Reserve has assured that it is prepared to hold interest rates near current levels until such time as the economy is functioning at something close to full capacity, perhaps as long as two or three more years. As investors, this makes it difficult to see how we can pursue our long-term goals with fixed income investments. Equities, with their potential for long-term growth of capital, and especially their long-term growth of dividends, seem to be a more rational approach. Therefore, we must tune out “volatility” and act as opposed to react. This proved to be the most effective approach in 2020. We believe it always will be.
May this year bring peace and joy to you and your families. As always, we thank you for the trust and confidence you have placed in us and we look forward to serving you in 2021!