Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.
We were all more than eager to put 2020 in the rearview mirror. It was a year that played out as part pandemic horror movie, and part political thriller with the contested U.S. election that refused to offer “The End.”
And just when you thought that things could not get any “curiouser,” along comes 2021 and the President Trump supporters who stormed (and briefly took over) the Capitol Building in Washington, DC, on Jan. 6, the day Congress confirmed the 2020 presidential and vice-presidential election.
How did the stock markets respond? They were back to their most impressive trick of 2020: shrugging off bad news. On Wednesday, the Dow Jones Industrial Average rose 437.8 points, or 1.44%, to 30,829.4; the S&P 500 gained 21.28 points, or 0.57%, to 3,748.14; and the Nasdaq Composite dropped 78.17 points, or 0.61%, to 12,740.79. The S&P/TSX Composite Index closed up 145.60 points, or 0.82%.
The markets have been consistent from November in that they have not taken seriously Trump’s challenge of the 2020 election results. In fact, U.S. and Canadian stock markets ended 2020 at all-time highs.
But we’re getting ahead of ourselves. This week’s column is a look back at key market events of 2020—and an attempt to make some sense of them.
Canadian banks took a back seat
I began this weekly column on July 12, 2020. In that post, we looked at Canadian banks that were forced to hold their dividends due to the pandemic. They were also not allowed to buy back shares. From that post…
“Since 1957, Canadian bank returns were positive in about 73% of the years and have outperformed the TSX index in approximately 67% of the years.”
Canadian banks are perpetual outperformers over the longer term. But 2020 was a year when the banks certainly did not outperform the market. The big banks as a group were up 4.4% for the year, while the TSX composite was up 5.6%. And that was largely thanks to the stellar performance of Shopify that lifted the Canadian indices.
Businesses, and the markets, coped with COVID-19
Of course, nothing dominated the year and the markets like the first modern pandemic.
COVID-19 pressed “fast forward” on trends already in play. The pandemic changed the way we live and work. Stay-at-home and work-from-home stocks and ETFs dominated investing for 2020, fuelling incredible stock-market gains for the big tech giants in the U.S., such as Amazon, Apple, Microsoft, Netflix and Google. And while many watchers were critical of the outsized stock market run for tech, those companies continued to deliver with incredible revenue and earnings growth.
Meanwhile, REITs (real estate investment trusts) were hit hard thanks to that work from home theme. In that post, we also mentioned the rise of ESG, or sustainable, investing, which had an incredible 2020.
We also witnessed the terrible hit to small businesses in Canada, which continue to struggle in COVID’s hold. From that post…
“The Canadian Chamber of Commerce, Restaurants Canada and other partners submitted a letter to Canadian government agencies asking for extensive coordinated support. If that support does not arrive, the group suggests at least 50% of Canadian restaurants will close their doors for good.”
That theme has become an unfortunate reality in the second half of 2020 and into 2021.
Investing in movie theatres in 2020 was not the ticket. Some of the other hardest hit industries were cruise lines, airlines, hotels, resorts, amusement parks, casinos, sports and entertainment, and restaurants.
It turned out to be another year for the traditional index-based balanced portfolio. Couch Potato investing worked again. (On my site, I showed the 2020 returns for major asset classes and balanced portfolio models.)
Markets didn’t care much about the U.S. presidential election
We looked at how U.S. stock markets actually predicted the U.S. election results.
The main takeaway was that the U.S. presidential election (or any U.S. election, for that matter) is not an important event for investors in the long run. We don’t invest in presidents in the States, or prime ministers in Canada or the UK; we invest in companies that can prosper over time. We invest in the private sector, not the public sector.
In 2020, investors in the U.S. stock market benefitted thanks to the creativity and ingenuity of the business leaders and their employees. The success was not thanks to any president, present or past.
This humorous take is courtesy of a tweet shared by investment advisor and portfolio manager Markus Muhs:
Canadian stock stories for 2020 and beyond
To kick off November, I suggested that investors might look at deals in the big Canadian dividend stocks; they had certainly started to outperform. And, in that post, I questioned whether bottom was in for Canadian energy stocks. So far, that appears to be the case, as the iShares energy index ETF is up over 50% from that date, outperforming the market by a considerable degree.
Bitcoin went parabolic
This may be the story of 2020, and perhaps 2021, as well.
Bitcoin’s performance is nothing short of parabolic. The price has moved from US$13,000 at the time of the first mention in this column to recently breaching $40,000 in the past week—a gain of more than 300% in less than three months. As a comparison point, it took about 20 years for the TSX 60 to earn a 300% from 1999. Yikes. (I’m happy to be along for the ride by way of the 3iQ funds.)
Vaccine reports boosted the markets
And on the theme of optimism, we started to get a glimpse of how we might get to the other side of the pandemic. Here’s where we first experienced that hope (from July 19)…
“Wednesday offered some good news on the COVID-19 front. While there are dozens upon dozens of groups working on vaccines, AstraZeneca and Oxford University may be leading the way. Early-stage human trial data on a COVID-19 vaccine being developed by this group will be published on July 20, The Lancet medical journal reported on Wednesday.”
On the positive vaccine news, many of the hard-hit stocks became “recovery stocks.”
And while we now have approved vaccines (I got the jab this Wednesday as I’m an approved caregiver for my mom), the vaccine rollout is going very slowly in the developed world. As well, there are fears it might not get to developing nations in any meaningful way until 2022 or 2023.
If we figure this out, we might be able to open the economy “in full.” That may mean the true recovery for those hard-hit sectors. There is incredible pent-up demand for travel, as well as experiences such as dining out, going to the live shows or movies, or taking in a live sports match. And Canadians flush with cash would support those industries.
We could see some quick and explosive spending. Will that put higher inflation back on the table?
We ended the year with the Santa Claus rally
One of the greater, and perhaps most head-scratching investment themes for 2020 is that we experienced the great disconnect. We saw stock market gains (which were especially impressive in the U.S. markets) during a pandemic that produced record unemployment and depression-like economic numbers. The markets are certainly forward thinking. We were even treated to a year-end Santa Claus stock market rally.
The pandemic will dominate again in 2021; the deployment of vaccines will be the wild card.
Personally, I hold a contrarian hunch or guess as to what might happen when we start to get to the other side of the pandemic. The markets have been riding a wave based on optimism. Once we have that pandemic under control, market makers might turn their attention to actual earnings and earnings prospects. And they might not like what they see.
There is an expression that markets like to climb a wall of worry.
We’ll be watching and reporting back in this space throughout 2021.