Stock Prices & Looking Ahead to 2021

Victor Levinson Comments

During November and December, stock prices in the US and internationally made significant gains, which took the three primary US indexes to new all-time highs. Since the March 23, 2000 lows of 2,237 for the S&P 500, 18,591 for the Dow Industrials, and 6,860 for the NASDAQ Composite, the three indexes closed December at 3,756; 30,606; and 12,888, respectively. The percentage gains were 67.9%, 64.6%, and 87.9%, respectively.

As our regular readers are well aware, Park Piedmont’s usual response to changing stock prices is to take the position that no one really knows the reasons why, even after the fact. There are simply too many countervailing factors impacting the direction and extent of stock price changes. That said, given gains of this magnitude in a relatively short time frame (November and December), we thought it would be helpful to review some of the more likely current factors being discussed in the financial media (see also the more detailed discussion in PPA’s November Comments).

  • The discovery and anticipated widespread distribution and administration of vaccines against the coronavirus, even with new negatives like the apparent mutation of the initial virus and serious problems with the distribution of the vaccines.
  • Anticipation of an improving economy, and with it corporate profitability, in the not so distant future.
  • A small number of very large, technology-driven companies benefitting financially from current conditions, which in turn has driven their prices, and the NASDAQ index, to extremely high levels.
  • The extremely low interest rates offered to investors, which make bonds a less attractive option for positive future investment returns and stocks a more enticing alternative. (Though note this has been taking place since March 2020.)
  • Further, low interest rates typically act as a stimulant to the economy. These very low rates have made it easier for all bond issuers to borrow.
  • A newly elected Democratic president, working with a congressional Democratic majority in both the House and Senate, so that additional government help is expected (see 7B below).
  • A recent NY Times article adds some additional after-the-fact reasons: “Why the Markets Boomed in a Year of Abject Human Misery,” (NYT, 1/2/21, page B5). “The central, befuddling economic reality in the US at the close of 2020 is that everything is terrible in the world, while everything is wonderful in the financial markets….To better understand this strange mix of buoyant markets and economic despair, it is worth turning to the data,… some of which offer a coherent narrative about how the US arrived at this point, with lessons about how policy, markets and the economy intersect, and reveal the sharp disparity between the pandemic year’s have and have nots..” (A) incomes fell only 0.5% from March through November, because most jobs lost were low-paying jobs; (B) huge government assistance in the form of unemployment insurance and direct payment benefits, along with small business loans; (C) reduced spending, more saving, and the need to find places for this extra savings, some of which was the stock market, some housing… “Just because there may be some explanations for the 2020 gains does not mean these higher asset prices will hold… these patterns can reverse themselves; savings turn negative, inflation returns such that the Fed has to back off its easy money policy earlier than expected. But 2021 has yet to be written, and if 2020 teaches one thing it is that the story arc is more unpredictable than you would think.”


Looking Ahead to 2021 and the Trouble with Crystal Balls

In his first piece of 2021, Jason Zweig, the “Intelligent Investor” columnist for the Wall Street Journal (WSJ 1/9/21), offered the following hypothetical:

“Imagine that it’s Jan. 1, 2020, and you have a magic crystal ball. It tells you that coronavirus will spread like wildfire, killing nearly 2 million people worldwide and putting the global economy into an unprecedented coma for months. Now imagine that you are the only person alive who knows that and you get to make one trade on the basis of that information. What would you do?”

Zweig concedes, as virtually all of us would, that given those circumstances, he would have expected stock values to decline. As Zweig puts it, “We … know you would have shorted, or bet against, stocks. Who wouldn’t have?”

And yet, the stock market recovered surprisingly (in many cases, stunningly) well after bottoming out in late March. The S&P 500 ended the year up 16.3%; the Dow rose by 7.3%; NASDAQ, predominantly composed of tech companies, rose a whopping 43.6%. And the Vanguard U.S. Stock Index Fund, which represents all of the public traded companies in the U.S., rose 21%. The stock indices are at or near all-time highs.

So much for 2020. What does that mean for 2021?

By now, you can probably guess our answer: we don’t know.

But it may surprise you that PPA’s perspective – that we can’t know the future and so shouldn’t hazard guesses about it – remains something of an outlier in the financial industry.

As December turns to January, Wall Street firms renew their annual ritual of forecasting the year ahead — summoning data, explaining trends, issuing warnings. “These prognosticators are smart people and often have interesting things to say about what has already occurred in the markets and the economy,” writes Jeff Sommer in his recent New York Times column, “Your Guess Is as Good as Mine, or Theirs” (NYT 12/20/20, page BU5). “But as far as predicting the future goes, Wall Street’s record is remarkable for its ineptitude.”

As compiled by Bloomberg and reported by Sommer, around this time last year, “the median consensus on Wall Street was that the S&P 500 would rise 2.7 percent in the 2020 calendar year.” That, of course, turned out to be dramatically low.  A few months later, in April 2020, as the coronavirus stopped the global economy in its tracks, forecasters hit reset and issued another set of predictions. Per Sommer: “They said the market would fall 11 percent. But the market had begun climbing on March 23, the day the Fed intervened to stem panic. The strategists failed to register the change in direction. If you had invested, based on their predictions, you would have missed a great bull market.”

Woefully inaccurate predictions by Wall Street’s prognostication factory aren’t limited to 2020. According to Sommer’s own research, this kind of inaccuracy has been the norm for the past two decades! Sommer reviewed the median annual stock predictions made by Wall Street analysts each December, dating back to 2000. He found that “the median Wall Street forecast from 2000 through 2020 missed its target by an average 12.9 percentage points…”

For his part, Zweig, the Wall Street Journal columnist, reached a strikingly similar conclusion, writing that “analysts’ earnings forecasts, and investment strategists’ predictions of market returns, turn out to be wrong every year,” (italics in original). Zweig, reflecting on the extraordinary turbulence of last year, notes, “[t]o me, the lesson of 2020 isn’t that a giant, unpredictable ‘black swan’ can wreak havoc with the best forecasts. Instead, the lesson is that whatever seems most obvious is least likely to happen.” Zweig continues: “the only incontrovertible evidence that the past offers about the financial markets is that they will surprise us in the future. The corollary to this historical law is that the future will most brutally surprise those who are the most certain they understand it.”

What then do we recommend?

First, review your portfolio to ensure that your asset allocation remains consistent with your goals, risk tolerance, and time horizon. If they’re aligned, stay the course. If they’re not – or if you fear they may not be – we can help you make thoughtful, deliberate modifications.

Second, insofar as you’re able, ignore the day-to-day pandemonium and re-allocate that time to the people and activities you most enjoy. That will give you a far better return on investment of your most valuable asset: time.

Welcome to 2021!