Money Managers Share Biggest Lessons Learned from 2020

Dear Rich Lifer,

On March 11, 2020, almost exactly a year ago, the longest-ever bull market ended. 

Stocks bottomed out on March 23, 2020, but the comeback since that fateful day has been groundbreaking. 

The S&P 500 fell from a record high to a bear market… and then in just 126 trading days—the fastest recovery in history—climbed back to new highs. 

All this happened while some market analysts predicted even more stock selloffs due to the increasing death toll and devastating job losses, both because of the coronavirus pandemic.

The market’s future remains unclear, but we do know we are still in the midst of the same pandemic that turned our lives upside down and inside out a year ago.

Just last week, surging bond yields sent many stocks tumbling, and now this week, the Dow has climbed above $32,000 to a record close on a 1.5% gain. This morning, the Dow extended Thursday’s gains, hitting a fresh intraday high of $32,675.74. The S&P hit its own record closing high on Thursday, as well.

Brand new inflation data—which we discussed yesterday, and which traders have been laser-focused on—showed a muted increase of 0.4% last month and eased fears of a rapid rise in interest rates. 

Regardless of the data from this week, the week before, or even the week to come, today we will get into some of the biggest lessons professional investors have learned from the crazy year we have lived through. 

Today, we will share the biggest takeaways about investing and explore what has remained consistent through it all.

#1: The Markets Look Forward

The week of March 23, 2020 was a game changer for the markets and the world. 

Politicians and health experts declared New York City the epicenter of the coronavirus pandemic, the U.K. went into lockdown and Japan postponed the Tokyo Olympics.

Despite all this, on March 24, 2020, a furious rally sent the Dow up more than 11% for its best session since 1933.

How was this possible?

Because of the eternal adage: the markets look forward. 

People buying stocks last March weren’t doing so because they believed the pandemic would quickly end; they were doing so because they were betting on a brighter future. 

And the bets played! Companies are expected to report a 3.9% increase in earnings for the fourth quarter of last year, the first quarter of year-over-year growth since the end of 2019, according to FactSet.

Don Calcagni, Chief Investment Officer of Mercer Advisors, states, “It’s hard, it feels counterintuitive for a lot of investors, but if you only focus on buying things that were loved in the past, you’ll always be buying high and selling low.” 

We also saw trends play out with “stay-at-home stocks” — like Domino’s Pizza and Zoom Video — that were incredibly popular in the first half of last year but had shares peak by the fall. 

As vaccine development improved, travel businesses, like Norwegian Cruise Line Holdings Ltd., American Airlines Group Ltd. and Delta Air Lines Inc., all saw double-digit increases on a percentage basis. 

Investors were looking forward to a brighter, vaccinated future rather than playing off of dying trends.  

#2: Things Move Fast 

It only took 16 trading days for the S&P 500 to fall from its February 19, 2020, record into a bear market — technically defined as a 20% drop. According to Dow Jones Market Data, this was the index’s fastest ever descent. 

However, the comeback that followed was also historically quick. Thus highlighting the second biggest takeaway from the year: cycles move quickly. 

Richard Grasfeder, senior portfolio manager at Boston Private, notes, “You’re really going to either have to play the speed game all the way around, or you gotta grin and bear it, be patient and just hang on and really stick to your buy and hold strategy.” 

We have seen the pace move particularly fast in the speculative corners of the market that include things like bitcoin, dogecoin or any of the “meme stocks” — like GameStop Corp., which I’m sure by now we may be tired of hearing about. 

Ben Carlson, director of institutional asset management at Ritholtz Wealth Management, adds his own opinion: “The fact that with technology, information moves so fast…I think you can make the case that it has really sped up market cycles,” 

#3: Don’t Bank on Volatility 

Analysts have largely argued that professional investors have the best chance to “prove themselves” when there is rampant dispersion in the markets, in other words, when the gap between the market’s losers and winners is wide.

However, this did not pan out in the first half of 2020, despite the volatility. According to S&P Dow Jones Indices, just 37% of U.S. large-cap equity funds managed to beat the S&P 500 over the first six months of 2020. 

Does this have the potential to change in 2021? Perhaps…

Already, Bank of America found 70% of U.S. large-cap mutual funds beat their benchmarks in February 2021, the highest share since 2007.

This seems to be because technology stocks have recently been underperforming. Technology, of course, has a large pull on indexes like the S&P 500, so money managers who haven’t heavily weighted the sector in their own funds have historically struggled to beat the market. 

This year, many managers are holding onto more shares of companies such as banks, utilities and energy producers, which have held up better in the market pullback. On the other hand, managers who bet big on tech stocks have seen larger losses.

The growth versus value debate is nothing new, and it rarely plays out well for investors. 

However, money managers like John Allen, chief investment officer of Aspiriant, are hopeful for the future of active investing. Mr. Allen looks toward the future with optimism stating, “We believe this is going to be a decade where active investing prevails.” 

Although no one can predict the future of the markets, we hope these three takeaways from 2020 can help guide you on the right investing path for 2021 and beyond.

To a richer life,

The Rich Life Roadmap Team 

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