2020 Year End Review

2020 had been a highly turbulent and stressful year for the financial markets, to put it mildly.

We have witnessed one of the most severe market collapses in recent memory, with the S&P500 dropping <red>-34%<red> from its February highs before recovering swiftly on stimulus and vaccine optimism [1]. As of yearend 2020, the Canadian TSX rose <green>+2.16%<green> [1]. In the U.S, the S&P500 is up <green>+16.20%<green>, while the DJIA rose <green>+7.23%<green> [1].

The 2020 Coronavirus Crash

The 2020 stock market crash was unique in that it was triggered by a global pandemic. As such, it was a novel threat that Wall Street was wholly unprepared for. The financial markets started the year being relatively optimistic and calm. However, as Covid-19 ultimately made its way across the world and into North America, panic began setting in. The market experienced several big selloffs in March as investors fled for safety. The DJIA dropped <red>-7.79%<red> on March 9, <red>-9.99%<red> on March 12, and <red>-12.93%<red> on March 16 [1]. 

The financial market crash signaled the beginning of the Covid-19 recession that sent many economies reeling. The U.S economy posted its sharpest economic contraction on record during the second quarter of 2020 [2]. The recession was driven largely by a forced shutdown of economic activity, affecting both demand and supply. The downturn hit some industries such as travel, hospitality, and oil particularly hard. The year saw an unprecedented oil market crash that sent crude prices into the negative territory briefly, partly a result of Covid-19 shutdowns and partly because of OPEC+ disagreements [1].

The selloff on Wall Street largely stopped as central banks and governments started taking drastic actions to support the economy. Central banks around the world acted with extraordinary swiftness and resolve in response to the unparalleled threat posed by Covid-19. In the world’s largest economy, the U.S Federal Reserve pledged to keep interest rates near zero while buying up bonds to ensure there was adequate liquidity in the markets. The U.S Congress also passed a $2.2 trillion stimulus package to further bolster the economy in late March. This was followed by a $900 billion stimulus package in December [3]. These drastic government and central bank actions were adopted all over the world, from Canada to the European Union to Japan [4]. As a result of such actions and due to progress on the coronavirus vaccine, the market entered a new bull market in April [1].

Our Positioning in 2020 

We started 2020 being rather conservatively positioned. Back in January, we warned our investors that the market was vulnerable to a major correction. We saw slowing earnings, an inverted yield curve, and stretched market valuations as reasons to be cautious. As a result, we allowed our portfolios to build up a cash cushion at the beginning of the year. 

This proved to be a prudent move. Although it was the coronavirus pandemic that ultimately led to the market panic and selloff, any shock to the system would have left investors equally vulnerable. However, as the market panicked and investors sold off everything they could and bought toilet paper, we saw good value in equities and began to buy. 

We quickly took our cash positions down and bought many of the stocks we’ve been watching for months and years. We have done the necessary research on these stocks but had not yet bought them due to their high prices. The market panic gave us a good entry price on many of them. Some examples of the stocks we bought on your behalf include Bank of America, Visa, Apple, RBC, and others. We take the long term view when investing your money. We believe the attractive valuation, strong economic moat, high returns on equity, and long term growth prospects on many of these names make them attractive investments that could drive superior risk-adjusted returns. 

In 2020, nearly all the portfolios we managed were able to outperform the market and post superior returns relative to the TSX index.