We learned a lot in 2020 through some very tumultuous times.
- Lesson #1: Prepare for the emergency before it happens.
- Lesson #2: When you’re building wealth and investing for your long-term goals it’s good to have stocks as part of your portfolio, but don’t abandon them when times get tough. That’s when you want to be buying stocks, not selling them.
- Lesson #3: Don’t play politics with your portfolio.
- Lesson #4: Capital markets like the stock market are forward looking. They’re not based on today’s headlines.
I’ve created a video that will illustrate these lessons. As I’ve said in my past, my mission is to provide meaningful education so you can make excellent financial decisions. Enjoy.
Transcript:
Hey everybody. This is Doug Pardieck with Talon Wealth Strategies. I’m a financial planner located here in Littleton, Colorado. I just want to wish everybody a Happy New Year. We’re sitting at the very beginning of January 2021. This video, and I’ve got many videos and I’ll show you that on my website, but this video is going to be focusing on what happened last year and what lessons do we need to learn from what happened, and how can we apply them going forward, and what does the market look like, what does the economy look like for the U.S. and for the globe in 2021. We’re going to get in all that so let’s get going.
For the last couple of months I’ve been meeting with high level money managers from incredible firms around the globe and talking to our portfolio managers and talking about what happened, what asset classes have done well. And looking forward in 2021, what investment asset classes do we think are going to do well. We’ll get into all that, but I do want to show you my website very quickly. All these videos that I shoot, and I’m trying to create educational videos for my clients and for my community. I want everybody to be better investors and better managers of their wealth so they can reach their financial goals and do good things for the community, do good things for the family and have some fun with it.
Let’s look at the website. In my blog section that’s where you go. TalonWealthStrategies.com up there in the blog. Click on that and you’ll see all the videos that I’ve created. I’ll be adding more to the library as we go on.
Lessons to review that we should be reminded of from what we just went through in the year 2020. Lesson number one. Prepare for the emergency before it happens. Lesson number two. When you’re building wealth and investing for your long-term goals it’s good to have stocks as part of your portfolio, but don’t abandon them when times get tough. That’s when you want to be buying stocks, not selling them. Lesson number three. Don’t play politics with your portfolio. And lesson number four. Capital markets like the stock market are forward looking. They’re not based on the current headlines going on today. They’re based on where do we think corporate earnings are going to be in six months, in eight months, in twelve months. So, those are some lessons that we want to keep in mind.
Let’s look back at 2020. What happened? Yep, there was a global pandemic. Very aware of that. It caused economies around the world to be shut down so a lot of businesses shut their doors forever. A lot of money was lost, a lot of people unemployed. The bull market that began in March of 2009, the stock market was on this nice bull market run for a long period of time. That finally came to an end here in 2020. In March we saw a 34% drop in the stock market ending the bull market. And we had a recession in the economy as well. The economy as well, the economy we know dropped significantly in that second quarter of 2020.
Let’s take a look at the stock market really quick. This is the S&P 500. In February into March we had our Black Swan event which is an event we just don’t see coming. It’s hard to prepare for or hard to plan for. The stock market dropped 34%. A great time to be a buyer, but nobody knew where the bottom was and within about two-and-a-half weeks half of the losses were recouped and the stock market rebounded even though there was still a lot of uncertainty and bad news out there. The stock market rebounded pretty quickly and it did take us until I would say it was probably August or so that we finally got back to all time highs again in the stock market for a full recovery. But it did take some time and there was still a lot of uncertainty.
And the election. For those of you that went to cash and wanted to wait and see what happened, here we are into January and we’re pretty sure who the president is going to be. The senate is being figured out today, but the market is a lot higher than it was in mid-October. So, the 2020 returns. Here we go. S&P, the Dow Jones, foreign stocks you could stop the video and look at these numbers, but those were the returns for 2020. So not too bad considering everything we went through.
One of the biggest questions, the most common questions I get is why did the stock market do so well when all these people are still dying? And I said this earlier but the stock market is forward looking. It’s looking beyond. It knows that vaccines are coming and that we’re going to get through this. The market is anticipating that Corporate America’s earnings are going to come back. All those companies that went out of business, those were not traded on the stock market. The vast majority of them were private, smaller businesses that are not publicly traded. The stock market, those companies had a lot of cash. They’re looking at rebounding in 2021 and a lot of those companies have a lot of cash and their earnings are expected to rise 20% to 30% this year as the economy opens up again. So, the stock market, the market is forward looking and not based on what’s going on today. It’s looking at where are we going to be at in the future. So, that’s one reason or a couple of reasons why the stock market has done so well.
The stock market is expensive. This chart is showing you PE valuations. When it’s low, when the line goes down and stocks get cheap that’s a great time to buy. When they get expensive, not a great time to buy. The good news about 2021 is we’re expecting that the corporate earnings and profits to rebound significantly in this year and that’s going to help stabilize these stock prices and hopefully we won’t see them so expensive. The earnings are going to catch up to the prices.
Here’s a look at how have asset classes performed since 2005. I just want to show you this on the year 2020, so find that column. If you look at a blend of all those different asset classes, the asset allocation portfolio that’s a blend it did 10.6% return. That’s a blend so it’s got some bonds in there along with stocks along with international stocks, but it’s a good way to maybe gauge of how did your portfolio do. Everybody’s got a different portfolio. Some of you are more growthy, you did better. Some of you are more conservative, you didn’t do as great. But this gives you some kind of a ballpark of what the average moderate portfolio did in the year 2020.
This slide shows don’t play politics with your portfolio. There’s three lines here and this is pretty interesting. This will shock a lot of people but go back to 1949. If you only invested, you put $10,000 in the S&P 500 index and you only invested when a republican was in the office for president, look at your performance. Terrible. Not very good at all. You gained a little bit but not much. Okay, the other guy who only invests during a democratic presidency did better. But the best investor was somebody who did not play politics with their portfolio. They just stayed invested throughout the entire period and you have a lot more wealth if you invest that way.
Let’s take a quick look at the U.S. economy. It was trending at 2.5% growth rate, but then we had this historic drop off. This is the worst recession we’ve had since the 1940s. Now it’s rebounding so the recession was very short. Thank goodness, very short. It’s rebounding, but it does have a long way to go to get back to its long-term trend rate. We don’t see the economy getting back to where it was at the beginning of 2020. We don’t expect it to get back there until late to early 2022, maybe 2023. It’s going to take a while. So, there’s a lot of jobs out there that were lost and we’ve got to create new jobs to help out those folks.
Here’s a chart just showing the global economy as far as manufacturing goes. Red is bad, green is good. So, we see everybody went through some really bad times in early 2020, but now we’re starting to see some green. So, there’s some new shoots growing in this forest. And so it’s beginning to happen. And this next chart shows okay, in 2021 where do we see the economy is going. In the United States, okay we expect a 3.1% growth rate in GDP. Eurozone at 5.2% growth, and emerging markets 6%. These are all expectations. We’ll see what happens but this is what the market and the experts think is going to happen in this year so this is good news.
We do know that a lot of money has been spent to help the economy, to help folks out there and our national federal debt has gone to historic highs. The good news right now this debt can be serviced. Interest rates on the debt is really low, near historic lows so the government can service it. Now if interest rates go up that’s good for your money market account and that’s good for your CDs. Bad for your mortgage if you’re going to refinance. It’s also bad for the federal government who has to service that debt at a higher interest rate. But right now the way it is we’re sitting okay. We can service that debt.
There’s reasons to be optimistic for 2021. First let’s look at the vaccine. Back in September, here’s a chart showing you all the vaccines in the pipeline. Three months later, wow. It’s really increased in numbers of vaccines that are in the pipeline that are being developed. We now have vaccines approved for use. We know that populations out there are getting the vaccine. I heard a stat earlier this week about COVID and fatalities. Eighty-two percent of the fatalities are in the age group of 65 years old or older. So, if we get that population vaccinated quickly here in January, February, March that will be a huge thing for feeling confident again, lowering the fatality rate for that age group and getting this economy back open again. So, well see how that goes but that’s a big hope for us.
Other good news is the U.S. consumer is in really good shape. Despite what’s going on, the household debt service ratio, U.S. consumers are still pretty healthy when it comes to their debt levels. And then the household net worth number on the bottom right. This is huge. Household net worth in the U.S. has increased by $10 trillion over the last year. This is a big number. This is dry powder for the U.S. economy. So, once we get to the other side of this pandemic, we get people vaccinated and we’re getting herd immunity. People are getting out there and spending money again. This is dry powder that’s going to go into the economy and this is really good news. There is a pent up party that’s coming. That’s going to be such good times when we can fill the football stadiums again and have a good time and spend money.
The capital markets. What are they expecting for 2021? They’re expecting a lot of jobs coming in, in the second half of the year. They expect all this dry powder, this cash sitting on the sidelines to fuel the economy, especially in quarters two, three and four of this year and beyond. And they expect corporate profits and earnings to be increasing dramatically 20% to 30% here in 2021. And that could get us a stock market return in the double digits – 10% to 20% is a reasonable expectation. So, we’ll see what happens. Nobody has a crystal ball but it’s still a good time to be in stocks. Cash and CDs and bonds are not paying as well right now so there’s going to be a lot more money flowing in the stock market trying to take advantage of the recovering economy and this should bode well for your stock portfolio.
Is there going to be any significant pullback? There always could be. It’s a low probability but there could be. And what would cause that? A 10% pullback or something bigger than that. If the vaccine does not rollout like we expect it to or there’s still a number of fatalities that are just too high and the economy has to stay somewhat locked down. This will be bad news for the economy. They’re not expecting this and so if that does happen that could lead to some volatility. If we get a 10% pullback or a 15% pullback that should be a good time to be a buyer into the stock market. Getting good stocks while they’re on sale. But we just don’t see that happening.
Again, my name is Doug Pardieck with Talon Wealth Strategies. I’m trying to help my community and families and my investors to be good and smart investors. Stick to the plan. Have a good plan. If I can be of any service to you or your family or friends, let me know. Here’s my contact information. Again, Happy New Year and blessings to you and your family. Take care.