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2020 Fourth Quarter Market Update- A New Chapter Thumbnail

2020 Fourth Quarter Market Update- A New Chapter

Well, that was a year to remember! I won’t spend too much time talking about 2020 as we are all looking forward to moving on. However, it may be worthwhile to do a short recap of what happened to markets and how they concluded in 2020. 

Things were pretty bad in March. All major stock indexes crashed in a dramatic fashion. The chart below depicts the covid crash at its lowest on March 23rd.  

The market recovery from March 23rd until year-end was equally dramatic.

I would venture to say that the market recovered quickly from the COVID crash (faster than almost anyone expected). In my opinion, I believe the recovery was extraordinary for three reasons.

1. Unprecedented stimulus delivered quickly
2. Unprecedented monetary policy
3. The COVID-19 vaccine. 

But enough about the past, what does the next chapter look like? As we have said many times in meetings and in market commentaries “The market is forward looking.” The market today DOES NOT reflect the economy today. The stock market reflects where it believes the economy is going to be 6 months from now.

Presently, the market is telling us that 6 months from now

1. The vaccine will be widely distributed, enabling the reopening and unleashing of many businesses still hampered by COVID-19.
2. Political uncertainty will not be a concern.
3. More stimulus is likely.
4. Interest rates will begin to rise. 

All of us are wondering, “Is the market correct?” If it is right, then the high valuations we are seeing are justified. If the market is wrong, then a correction is in order.

Time will tell, but I believe all of those scenarios I stipulated above are possible. Unfortunately, I believe the market is discounting two headwinds. 

The first is high valuations. In simple terms stocks are expensive. Investors seem not to mind buying expensive stocks right now, but there is always a point at which stocks become unattractive based on valuations. We cannot predict when that will happen or if it will happen, but it's important that we keep this in mind. Our investment process includes looking at valuations and often we look to keep a strategic allocation to “value” stocks. Value stocks are stocks that have a lower valuation than the broader market. This means they are not as expensive. 

The second potential headwind is the potential of increased taxes and regulation. Not to get political here, but it certainly appears the Democrats will have control of The Senate, The House, and the White House. Policy proposals from Democrats indicate a desire to raise taxes on corporations and high income individuals. Additionally, increasing environmental regulations seems very likely under a Biden administration. You may agree with all of those policies, however, in general, higher taxes and increased regulation are typically not looked upon positively by markets. 

As you know, as advisors we don’t take much of a political stance. That is not our job. However, that abstinence from policy position makes a hard stop at the intersection of your money and policy. When policy may impact your portfolio, taxes, or financial plan, we want you to be aware of what that impact might be.

We, of course, cannot know if investors will become weary of high valuations or what policies will be successfully implemented that markets dislike. We do believe that high valuations in the U.S. along with policy risks lead to a scenario where international stocks become more attractive. The U.S. makes up about 58% of the world stock market value; the other 42% of the market is international. We have long argued for a strategic allocation to international stocks and we believe that allocation is as important now as it ever has been. 

As 2021 unfolds, we will continue to provide our insights. We look forward to hopefully seeing many of you in person as we know it has been far too long. Happy New Year!

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments 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. Financial Strategies Group, Inc 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.

Written by: Brice Carter

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