It has certainly been a year of challenges, and I’m sure many are eagerly anticipating the promise of a fresh start in the coming New Year.
Lessons from past crises proved to be very useful for me as I managed my client’s investment portfolios during this tumultuous year. More specifically, having a properly built financial plan that ensures portfolios are constructed and managed to meet the needs of my clients. Maintaining a level of discipline to control one’s emotions and look past the short-term was especially important. Lastly, being prepared to be proactive through rebalancing and identifying opportunities that arise when markets reach extreme levels of pessimism and optimism. These techniques that I employed ensured that my portfolios not only withstood this volatile year but thrived.
A dark year is giving way to a brighter outlook as the calendar turns, and the Fed has made clear its accommodation will be a way of life for the economy and markets. The answer lies in the uneven nature of the recovery and the near-crisis levels that are still impacting large parts of the economy. For example:
- Workers making less than $27,000/year—who represent nearly 40 percent of the U.S. labor force—continue to suffer a near 20 percent drop in employment.
- Businesses that rely primarily on bank financing have demonstrated a slow financial improvement due to bank’s tightening borrowing standards.
Government stimulus would certainly be of near-term benefit to the economy, but even without new legislation, we have some powerful tailwinds supporting capital markets, such as:
- An accommodative Fed: The reality is that the Fed is not likely raising rates for years.
- Pent-up demand: Personal savings have nearly doubled in 2020 and a return to normalcy has the potential to unlock these savings.
- A weaker dollar: The nearly 10 percent drop in the U.S. Dollar Index since May helps companies on many levels.
The promise of the vaccine helping to move the economy back towards something that resembles “normal” has brought the stock markets to new high ground and has caused most forecasts for the new year ahead to be optimistic for further recovery.
This elevated optimism indicates that the longer-term trends remain favorable, however it also urges caution ahead for the near term. The market does tend to do the unexpected much of the time as we have seen, and surprises most investors. Hindsight is always 2020!