Friday Reflection | December 31, 2020
Progress, Not Perfection
On January 1, millions of people will embark on the global ritual of declaring a New Year’s resolution. This annual commitment to positive change can be documented as far back as 4,000 years, which is impressive longevity given that research shows many resolutions don’t make it past January.
As we prepare to turn the calendar again, we at North Berkeley Wealth are reflecting on the potential for change on many levels, and emerging economic themes in the coming year. We will let go of 2020, leaving behind a year that was marked by disruption, hardship, and loss. While the year ahead is unlikely to be perfectly smooth, we do expect growth and progress in controlling the pandemic and for the broad economy as a result.
As we begin 2021, consumer behaviors and preferences have already changed dramatically due to pandemic adaptation. Thankfully, some adjustments don’t need to persist. With the widespread adoption of the vaccine, we expect schools, arts performances, and sporting events to return to physical spaces. We have the opportunity to weave together new virtual skills with the effectiveness of live interaction. As we do so, the economy we are recovering into will be transformed from the one we left behind in March 2020.
Context is Key
Annual growth or decline in financial markets is typically simplified to a single percentage return, with context relegated to the footnotes. In 2020, context is key to understanding this uniquely difficult year as it ends and investors anticipate economic recovery and earnings growth heading into 2021.
At the headline level, both stock and bond indices ended the year with positive returns. More than that, some sectors – including technology and renewable energy – experienced staggering price growth and certain stock indices hit new all-time highs. For investors, these positive numbers insufficiently reflect the volatility that encompassed the year. The S&P 500 experienced a -34% price decline from February to March, and the S&P 600 small cap index declined by -42% over the same one month time period.1 This historic crash spurred questions about the possibility of another great depression amid echoes of 2008 downside volatility. Market price drops were dramatic as the pandemic initially surged, reflecting investors’ fear and uncertainty. While some market prices have now recovered to all-time highs, the staggering increase in unemployment remains, and many other economic metrics have not returned to pre-pandemic levels.
Despite persistent struggles in the economy, stock prices did recover sharply starting in April, beginning an erratic but continuous path of growth for the remainder of the year. A primary reason for this recovery was the swift and decisive action of the Fed and US Congress on stimulus measures, again effectively lowering interest rates to zero. We wrote about those stimulus policies, and the speed with which they arrived – under two months after the onset of the pandemic, versus more than a year later in the 2008 crisis.
The dramatic drop in interest rates, while helpful to consumers and businesses, creates a bleaker prospect for cautious investors. Uncomfortable decisions arise when CDs and bank savings no longer pay any meaningful return, and in fact, are not keeping up with inflation. This distortion of normal economic relationships incentivizes investment into stocks and bonds instead as the market becomes the only way to earn any return on your capital. One economist recently characterized the market as being coerced higher by near-zero rates, and interest rate coercion is hardly a sustainable policy for true economic growth.2
The (Market) Recovery
“The stock market is not the economy, so don’t believe for a second that record equity prices mean the road ahead isn’t going to be a bumpy one.”
– Dave Rosenberg
The price recovery in the market has been impressive, but not an even one across industries and companies. We wrote about the K shaped recovery earlier this fall to highlight the asymmetric nature of the market this year. The initial stock market recovery was concentrated on large technology and work-from-home stocks, while much of the broad market remained negative until late in the year. Fears lingered through subsequent waves of infections and a deeply contested election cycle. Still, the market remained resilient, escaping the volatility experienced earlier this year. Positive vaccine news in November seems to have eclipsed further pandemic surge concerns, broadening the market recovery beyond select large company stocks.
The hardest hit industries have not recovered, but adaptations on the ground have already been significant and may be a foundation for future growth. We wrote about the innovation in restaurants, travel, renewable energy, and digital retail platforms over the course of the year. Looking ahead there are definite growth trends heading into 2021 that can help the recovery remain resilient.
Consumers learned to be more self-reliant this year. Forced adaptation inspired people to cultivate backyard gardens, bake bread, undertake home improvements, and transform homes into office spaces and classrooms. Similarly, millions of people turned to delivery apps for groceries, home goods, and all manner of shopping. Acceleration of the e-commerce trend is likely to be resilient even as the pandemic ebbs, and we expect many meetings and business dealings will remain virtual in the coming years. The companies that support these trends – renewable energy, e-commerce, digital work, and DIY projects – should provide a secular tailwind for portfolios in the decade ahead.
Quality, Not Quantity
Progress will be a theme of 2021, economically and personally. On the personal side, NPR’s Planet Money newsletter recently highlighted research from Stockholm University’s Department of Psychology about what characteristics make a New Year’s resolution stick.3
One aspect of the study explored the efficacy of flexible New Year’s resolutions (such as improving overall health throughout the year) versus highly specific goals (such as losing 3 pounds per week). The data suggest that flexible goals led to more success, while hyper-specific goals are abandoned more quickly. They concluded that the demoralizing aspects of specific failure led to the abandonment of the goal. For example, people who didn’t meet weight loss targets in February decided to give up and try again the following year, while those that gave more leeway for ups and downs at the outset were better able to stay committed despite setbacks. The analogous lesson for investors is that growth is not linear; staying invested through up and down volatility offers the best path to meet financial goals. The intention of our diversified portfolios is progress, not perfection.
This year, investors were reminded in a stark way that significant market corrections are a normal part of long-term investing. We had many conversations about risk tolerance and some clients decided to modify their plan — that’s okay! Our goal is to remain in close partnership with our clients and develop a strategy that takes advantage of market resilience and provides financial flexibility over time for personal choices and opportunities.
We wish everyone a healthy, happy, and prosperous New Year in 2021! Please be in touch with any questions, and we look forward to our next conversation.
1 Morningstar Direct data on S&P 500 and S&P 600 performance.
2 Consuelo Mack interviewing Ed Hyman. WEALTHTRACK Episode #1725; Originally Broadcast on December 18, 2020. wealthtrack.com
3 A large-scale experiment on New Year’s resolutions: Approach-oriented goals are more successful than avoidance-oriented goals. By Martin Oscarsson, Per Carlbring, Gerhard Andersson, Alexander Rozental. Published December 9, 2020. https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0234097
About Brian Kozel, CFP®
Brian Kozel works as a partner and lead advisor at North Berkeley Wealth to help his clients feel confident in their financial decisions.
This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.