Mid-term U.S. Government Bond interest rates dropped by 50% in 2020.
In the above graph, rates fell, and remember that prices on bonds move opposite of rates. So with rates down all year long, if you owned the bonds during this drop in rates, you made great money since bonds rose in price more than 15% in 2020.
As we step back and look at the stock markets, we easily see lots and lots of changes occurring and much of it occurring in very short time frames. Volatility was through the roof at times in 2020.
The month of January gave stocks only a fractional loss. As it turned out it was just the beginning of stronger downturns which hinged in a highly related way to Covid but earnings for corporations had peaked all the way back in the third quarter of 2018. Stocks were ripe for a pullback and they were just looking for a reason to fall. So the trigger for the "primed for a pullback" in stocks came quickly. February brought slightly more than an 8% downturn, followed by March which dropped by more than 12%! Thoughts of a potential repeat of the market crash of 2008 seemed to weigh on many investors' minds as the first quarter of 2020 came to a close.
.The First Quarter of 2020 - Worst quarter in a decade.
But there were a few bright spots from the first quarter of 2020. Both of these are areas we invested in and openly discussed month after month during 2020. The two we spent ample time reviewing were long term government bonds and precious metals. In the first quarter of 2020, long term government bonds rallied very nicely and were up 20%+ while stocks were down 20%+ over the same period. Another area of performance was with precious metals. Precious metals held their own in the quarter and they went on to finish the year up more than 45%. Thankfully they didn't have to climb back up from their big fall in the first quarter as stocks did. To Capital Research's way of thinking, this falls under the heading of true diversification.
Not all investment areas were negatively impacted by the impact of Covid.
U.S. Government Bonds and Precious Metals defied the downward spiral.
Times like the first quarter of 2020 are precisely one of the key reasons why we use mathematical/quantitative models for investing. Models don’t worry or fret about what's in the news, pandemics, elections, all-time highs, and the like. Models continuously walk through the math and keep the risk factors that have been programmed into them always on the front burner. I have not kept count over the last three-plus decades yet there have been so many times one of our models got so close to telling us to buy or to sell and then simply the model stepped away from that possible action seemingly a day or two before we thought it would happen. It has saved us numerous times from making a reactive decision to something we thought might or surely would occur.
So we glanced at the first portion of the year, now let's move to the latter portion of 2020 and see if any change came into play.
Plenty occurred in the fourth quarter. The month of October was basically a soft month and nothing too exciting occurred at all. Then we hit the first week of November and stocks just simply roared ahead! Shooting for double-digit returns in the month of November and it actually turned out to be the strongest monthly return for a month during the last 30 years. As we stepped into December many hoped that the strong rally from November would continue but there was just no leftover energy after the strong push the month before. While December closed positive, up more than 2%, there seemed to be no true Santa Claus rally which occurs typically between Christmas and New Years'.
One thing we did see and commented on it in our last newsletter, value stocks and small-cap stocks, specifically the Russell 2000 and the MidCap 400, seemed to defy gravity as well as defy the S&P 500, and the Russell and the mid-cap climbed precipitously higher as we moved to the end of the year.
It is not unusual early in a healthy stock rally for markets to make their biggest moves in the earliest part of the cycle. As a rally begins to age some, the strength in it does tend to abate some and the growth will settle down as well.
We do see there is some degree of separation in this rally, some stocks doing very well and yet there are other stocks, susceptible to the business declines based on the spread of the virus, which struggle today and will struggle until the virus is well on its way out. That gives us a divided market going forward which will look like this, <, some rising more and some falling as it all plays out.
We have made several changes in November and December which helped us take advantage of some of the strengths our models have picked up on.
A busy year-end gave positive messages to a year of negative news.
We do see 2021 being a very different year to 2020 and with that, the areas which will bring strength to the stock market and the bond markets will be very different than we saw one year ago today.
Definitely something to think about. All the above said for 2020, remember that since the first day of this century, with reinvesting all dividends, the true rate of return for the S&P 500 is.... 4.447%/year!
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