2020 will be remembered for many, many things. The challenges we faced as a nation were both historic and grave. While we all bore the responsibility of addressing the crisis, we also witnessed wild swings in the markets. Both the stock and bond markets experienced severe volatility in 2020. Case in point, the stock market posted record highs early in the year, followed by a massive decline as the effects of COVID-19 spread, and then one of the fastest rallies ever as the Federal Reserve threw its support behind the financial markets.
The markets can be very fickle — whatever happens can surprise even the most seasoned investors. For example, the stock and bond markets both posted significantly positive returns in 2020. In fact, the return of the broad stock market, measured by the S&P 500 Index, was nearly identical to the total return posted by long Treasury bonds, as measured by the iShares 20+ Year Treasury Bond ETF (TLT). In hindsight, a historian might review the returns and not think much other than, “Hey, it looks like 2020 was a really good year for investors!” While interesting in its own right, this end result masked significant volatility and swings, especially in both stocks and bonds.
The COVID-19 crisis led to a sharp decline in stock prices and a flight to quality into Treasury bonds, causing a huge discrepancy in the performance of stocks versus bonds at certain points in the year. When the gap was at its widest in March, long bonds were outperforming stocks by more than 50%, which is incredible. But even more incredible was the comeback staged by stocks. 2020’s stock market recovery was by far the fastest that we have experienced in recent history. By July, the stock market reached positive territory. While there was some instability in September and November, the market regained its footing and finished the year with a positive total return of 18.39%. Long bonds, which were up more than 25% by March, steadily declined from their peak and finished the year at a near-identical level to the stock market, up 18.15%. Just another boring year in the financial markets, right?
As 2020 has once again proven, it is very difficult, if not impossible, to predict what will happen in the markets from year to year. The good news is that, as a bottom-up fundamental investor, I do not have to. My task is still challenging but much more repeatable over time. My mission is to find strong companies that are run by exemplary managers, with good or improving balance sheets and solid free cash flows. As 2020 has demonstrated, finding worthy companies at reasonable valuations seems to be just as tricky as predicting the moves in the markets. But fortunately, the bouts of volatility that we experience from time to time also provide opportunity to capitalize on the market’s swings. It is my job to be ready to act when necessary for the benefit of our clients and investors.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
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