2021: Year in Review
Overall, global stocks went up about 18.5% last year.1 Once again, domestic stocks fared better than foreign equities. The US stock market, represented by the S&P 500 Index (“S&P 500”), jumped nearly 29%, outpacing developed foreign markets that went up “only” 11%.2 Emerging markets, struggling with vaccine distribution and supply-chain issues, were down about 2.5%.3
At just under a 30% gain, the S&P 500 return ranks 20th out of the past 94 years – quite remarkable given the year investors survived. As the attached chart shows, calendar year 2020 was chockablock with alarming events. We began the year with very few Americans vaccinated against COVID-19 and, less than a week later, experienced the storming and sacking of the US Capitol Building. COVID mutated into (at least) two major variants, leading to periodic grim headlines each time US deaths surpassed another 100K benchmark. More fires in the West. Ice storms and power failures in Texas. A large Chinese default announced. National Guard in the streets. The Suez Canal blocked.
Can we find any silver lining in all of this? We believe so. In fact, it’s possible we might become better investors, not despite the turmoil but because of it. Like a phoenix rising from its proverbial ashes or a superhero origin story, hopefully we will emerge from these extraordinarily difficult times stronger than before. Moreover, we believe these last two years have revealed a potential “Investor Superpower”: memory.
Two years ago the US confirmed its first case of COVID-19. At that point, it was clear the disease could have mass global reach. But we did not know whether and to what extent COVID might or would spread in the United States. Suffice it to say, many investors felt concerned about the impact of a global pandemic on capital markets.
Clients may recall our advice: stay the course; we don’t know how much the disease will spread and, even if it does, we don’t know what will happen in the markets. Many clients expressed extreme skepticism regarding whether to stay fully invested. Most often, they voiced their concern as “We’ve never experienced something like this before.” The worst investor fears soon materialized: markets dropped 30% in less than two months. The bear market, however, was short lived. Most major stock indexes returned to their previous highs by the fall.4
Yet Autumn 2020 provided little solace for investors as fears of a contested election grew. Clients from an array of political viewpoints felt concerned we might face protests, civil disorder, even violence. We had many discussions in which clients pondered whether it might be prudent to take some of or all their assets out of equities. Again, clients may recall our advice: stay the course; we don’t know whether we’ll have a contested election and, even so, we don’t know what might happen in the markets. Again, we discussed whether we were in “unprecedented times” and whether “we’ve ever experienced anything like this before.”
Once again many of our worst fears materialized. We did have a contested election. We did have civil disorder. We even had violence. The equity markets, however, barely paused at the insurrection on their way to extremely robust returns for the year.
When clients ask what we think might happen in the future, we often say something to the effect of “we don’t have a crystal ball.” That’s certainly true. But here’s the thing: even a crystal ball wouldn’t have helped!
If we knew, at the end of 2019, that we’d face a global pandemic that shuts down entire sectors of our economy, claims the lives of nearly one million Americans, and still infects over 100K Americans each day almost two years later, we would have very likely said, “Okay, time to take some money off the table.”
If we knew, at the end of 2020, that the United States would not have an easy, uncontested transfer of political power; that we’d have mass protests and an armed insurrection that we’d have, according to some reports, a narrowly thwarted assassination attempt on the vice president, we would have very likely said, “Okay, perhaps we should get clients out of the markets until we know what’s going on.”
Fortunately, we didn’t. Many of our worst fears manifested and, somehow, the US stock market has gone up over 50% in those two years.5 Investors that stayed the course likely fared very well. Investors who didn’t, we hope, can learn a valuable lesson.
Two in fact. First, as noted above, we simply don’t know what the future may bring. Even if we’re correct about very bad things happening, it’s far from clear that markets will act the way we expect. Markets don’t share or respond to our feelings.
Second, and relatedly, unprecedented times don’t necessarily mean bad investment results. We tend to feel worse when we feel less certain about the future. It’s natural. Routine is comfort. Surprise is unsettling. As we’ve discussed before, we believe there is an emotional cost to investing. At Wealth Architects, we do our best to help reduce the toll investing can take, but we can’t eliminate it. The toll is usually highest when we feel as though we’re in uncharted territory.
That’s where memory, the Investor Superpower, comes in. As people and investors, we are different than we were two years ago. We have faced (and are facing) a global pandemic. We have faced political disorder. And we came out of it okay. Our memory is longer and stronger than before. The next time we face a pandemic or political unrest – hopefully not for a very long time – we will be able to call upon our memory of these last two years and can find some solace that we’ve faced these before and make it easier to stay the course.
Moreover, we can carry these memories with us the next time we face “unprecedented times.” When that happens, and it will, our advice will be almost the same: stay the course. Recall what happened the last time we felt this way. Recall that, as difficult as it was, it ended, and we survived. Memory can’t prevent bad things from happening, but it can bring us comfort and help us make better investment decisions. There is great power in that. Indeed, a superpower.
The information provided in this commentary is intended to be informative and not intended to be advice relative to any investment or portfolio offered through Wealth Architects. The views expressed in this commentary reflect the opinion of the author based on data available as of the date this article [essay] was written and is subject to change without notice. This commentary is not a complete analysis of any sector, industry or security. Individual investors should consult with their financial advisor before implementing changes in their portfolio based on opinions expressed. The information provided in this commentary is not a solicitation for the investment management or other services offered by Wealth Architects. References incorporated into the report [essay] from third party sources are as of the date specified and are believed to be reliable. Wealth Architects is not responsible for errors in the third party data.
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1 Global stocks represented by the MSCI ACWI Index (net). Past performance is no guarantee of future results.
2 US stocks represented by the S&P 500 Index, foreign stocks by the MSCI EAFE Index (net).
3 Emerging-markets stocks represented by the MSCEI EM Index (net). Note: supply-chain issues impacted nearly everyone. But the smaller and/or less developed the country, the more they are likely to rely on fewer chains.
4 Q4 2020: Year In Review, Wealth Architects.
5 Source: Wealth Architects.