2020 – a great year for stocks despite the COVID-19 crisis - January 11, 2021
Without a doubt, 2020 was a very tough year for each and every economy of the world. Understandably, the global stock markets were affected as well: just remember the stocks tumble in February and March. On March 23, S&P 500 closed almost 31% below the level it had at the beginning of the year. However, stock markets recovered relatively quickly in general. Given the enormous economic impact of the COVID-19 pandemic, 2020 was an unprecedented year of stock price growth. This was a year of wild equities valuations: S&P 500 reached such a high price-earnings ratio that has not been observed over the past decade and has rarely been seen before. It also was a year of extraordinary volatility, the highest since 2008.
US stock prices performed quite well in 2020: the S&P 500 increased 16.3%. Of course, it's not the highest result in history. However, this is a decent increase, well above the average for the last 50 years (7.7%). The growth was driven mainly by IT sector, which was a clear winner of the COVID crisis as the whole world had to stay at home and go online due to the pandemic. Consumer discretionary and communication services sectors also recorded a substantial growth. However, some sectors recorded a decline. Energy sector lost much of its market capitalization. Real estate, financials, and utilities sectors declined as well. S&P 500 return 2020 per sector is presented in the Chart 1. The S&P 500 closed 2020 at all times high despite the COVID crisis. Valuations of the stocks were supported by low interest rates, economic stimuli, and speculative behavior.
2020 was also a strong year for Asian stocks. For example, Nikkei 225 increased 16.0%, SSE Composite added 13.9%. However, European stocks didn’t perform that well: DAX rose by only 3.5%, CAC 40 declined 7.1%, FTSE 100 dropped 14.3%, STOXX Europe 600 decreased 3.8%.
What can we expect from 2021? COVID related risks and uncertainties remain the primary topic. However, with multiple vaccines available and vaccination beginning in many countries, we can expect the COVID-19 crisis to weaken. Quelling of anxiety around U.S. election outcomes and EU-UK trade deal have also a positive effect for the stock markets. As a result, uncertainty and volatility can be expected to decrease. However, there is one important thing that we should be paying attention to. The global stock market has faced valuations never seen before. Widening gaps between fundamentals and valuations and growing stock market capitalization-to-GDP ratio are strong warning indicators. Bubble talk is getting a stronger presence. Perhaps, zero interest rates can justify current broader market valuations, but there are certainly assets that are in a bubble now. Thus, we should not be surprised if we see a correction.
Anyway, good diversification and patience are the things that will help investors reduce risk and achieve their long-term return targets. As they did in 2020, an extraordinary year without a doubt. Here are our New Year wishes for all our clients and readers of this blog: stay patient, avoid overreaction, make informed decisions, don’t fear standing apart from the crowd. And a COVID-free world, of course.
Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.