Economy and U.S. Stock Market 2020 Year in Review
COVID-19 Pandemic Hammers the Economy
The year seemed to start normally but dominated by news about the U.S. and China trade war, tariffs, and impeachment. But early news of the coronavirus pandemic foreshadowed a very different year to say the least. By March, the COVID-19 pandemic spread around the world negatively impacting the global economy and affecting people’s lives as infections and deaths increased. Many of us watched or read the news as the virus spread into Europe and then the U.S.
The virus’ impact was devastating on economies to put it mildly. In the U.S., GDP declined by a record -31.4% in the second quarter of 2020. Similar declines were experienced around the world.
Unemployment in the U.S. spiked to almost 15%, which was the highest on record going back to 1948. The U.S. and much of the world entered a recession fairly rapidly. This was unlike the last recession during the sub-prime mortgage crisis, which evolved slowly like a train wreck in slow motion.
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Stock Market Drops Like A Rock
This year the market has been unlike any other since I started investing. The drop in stock prices in late-March was unprecedented. In a few short weeks the major markets were down as much as -41% in the case of the Russell 2000, -35% in the case of the Dow Jones 30, and -30% for the S&P 500. The tech heavy Nasdaq-100 did better but was still down almost -20%. I used Stock Rover* to make the comparisons. It just goes to show how random the stock market can be. The market is complex and constantly changing. In any case, the market was clearly expecting companies to perform poorly in aggregate due to the pandemic.
The Fed Rides to the Rescue
The drop was gut wrenching. But those who sold in fear missed the snap back and the impressive gains since the lows. Much of this was due to extraordinary action by the Fed and Chairman Powell as they pumped liquidity into the banking system and the U.S. economy. The Fed lowered the Federal funds rate to a range of 0% to 0.25%. The Fed also resumed purchasing U.S. Treasuries and mortgage-backed securities, revived the Primary Dealer Credit Facility, backstopped money market mutual funds, expanded repurchase operations, and started to directly lend to banks and large corporations, as well as other moves. There was some discussion in the financial news about the Fed running out of firepower to combat economic contraction and deflation. But surely the COVID-19 pandemic shows that the Fed can be very creative and move quickly when it needs to.
Congress Steps Up to The Plate
Not to be outdone the U.S. Congress passed the CARES Act that added $2.2 trillion, yes…trillion, in stimulus, which was promptly signed and made into law. Some of this stimulus went directly to consumers with one-time cash payments of $1,200, enhanced unemployment benefits, Paycheck Protection Program, loans to corporations, billions more to local and state governments, and not to mention tax credits, deferrals, and deductions.
Stock Market Whiplash
The government was literally dropping money into the laps of consumers and businesses. The combined action of the Fed and the CARES Act arguably acted as a shot caffeine to the economy and it bounced back rapidly. The stock market responded in kind and did not look back in 2020. The U.S. GDP grew +33.4% in the third quarter setting another record in a single quarter. The stock market surged and by late-Spring the NASDAQ-100 had recovered all of its losses and kept going. The NASDAQ-100 is up over +47% year-to-date and is on track for a banner year. The other indices have not done as well but will likely still have double-digit increases except the Dow 30. The Dow 30 is being hit be poor performance by oil majors, Boeing (BA), and Walgreens Boots (WBA). But still, the Dow Jones cleared 30,000 rising to a record.
2020 Year in Review – What have I Learned?
Black Swans will at some time impact the economy and stock market. COVID-19 is a black swan event. By definition this means that it is rare, hard to predict, and has a large impact. By its very nature a pandemic has a large impact. Certainly, it brought the global economy to its knees and the stock market plunged in a short time. A severe pandemic is also rare with about a 1 in 100 to 1 in 200 chance of happening. There are epidemics and smaller pandemics. But the big ones are rare. They are also hard to predict since pandemics are random.
By the same token, stock market declines of over -20% or a bear market are rare but not as rare as global pandemics, hard to predict, and have a large impact. Using the S&P 500 as a proxy for the stock market, since 1945 there have been only nine declines of -20% to -40% and three declines of over -40%. There are many more smaller declines. So that means there have been 12 bear markets in about 75 years or one every 6 to 7 years. Obviously, there is a much greater probability for a bear market to happen than a global pandemic. A decline of the magnitude recently experienced by the S&P 500 is also random and hard to predict. That said, it has a large impact on your net worth and retirement plans.
Buy and Hold Still Works despite the roller coaster. It is looking like 2020 will be a good year for the stock market despite rising infections and deaths around the world. It probably did not seem that way in late-March or early-April when the market was falling. But few could have predicted the actions of the Fed and U.S. Congress to stave off a deep recession or worse. If you believed some news headlines we were heading into a long and deep recession. If you had sold as the market declined it is likely that you would have missed the snap back and the recovery in the market. The problem is that you would have had to been correct twice, once on the way down and once on the way up. For buy and hold you only need to be correct once, when you buy.
The real question though, did you buy when there was blood on the streets to paraphrase Baron Rothchild during the Battle of Waterloo? For some stocks, the downturn was once in a generation buying opportunity. Even some Dividend Kings were down over -50% or more. At its nadir, Sysco (SYY) was trading at $30.43 per share well off the high of $83.13 per share. The stock more than doubled from its bottom. Another Dividend King with a similar trajectory was Genuine Parts Company (GPC), which has doubled since its bottom. Many tech stocks, which seemingly are benefitting from the pandemic, set 52-week lows and then powered higher during the recovery and in some cases are now trading near all-time highs.
It is arguably being a contrarian that can lead to good returns for a buy and hold strategy. But not everyone has the stomach for it. Some fear missing the bottom and not maximizing gains. Others fear buying too early and having more losses. Historical valuation metrics can serve as a guide but sometimes history does not repeat, and stocks drop further than expected. Realistically though, looking at the price-to-earnings chart of a stock like Sysco it seems like a no brainer to have bought at end of March. Of course, hindsight is 20/20 and it seems obvious now. But when the market is free falling and headlines are talking about long recessions it is not so easy to look ahead with the expectation of better times.
2020 Year in Review – Dividend Growth Portfolio
As a financial blogger I probably spend more time than the average person looking at stocks, screens, watchlists, and the like. I also read the financial news pretty much every day. I always need to find new ideas to write about. I mostly write about stocks that I own or want to own at the right price. I also review the dividend growth portfolio periodically.
In 2020, my large cap dividend growth portfolio was up +19.3% versus the S&P 500 at +17.8%. I am looking at investor returns after accounting for reinvested dividends and also additional purchases. I did not sell any stocks this year in this portfolio. My best performing stock to date is United Parcel Service (UPS), which is benefitting from more deliveries during the pandemic. My worst performing stock to date is NorthWestern Corp (NWE), which had reduced demand for electricity.
I had 7 up months and 5 down months. The best month was November when I was up +11% versus +11.8% for the index, while the worst month was February when I was down -8.5% versus -8.4% for the index. April was even worse month for the index at -13.7% but I was only down -6.5%. This one month is the main reason for my out performance this year. I added to my positions in existing stocks as the markets declined and before the markets reversed themselves and began their trek upwards. It really just goes to show that buy and hold and dividend growth investing can work. Of course, I add a little bit of a contrarian twist to my personal investing style.
2020 Year In Review – State of the Dividend Power Blog
As I look back at 2020 and conduct my year in review I did notice that the Dividend Power blog grew by leaps and bounds. I made a major move to self-hosting early this year and expanded from there. To put this in context, the blog had 922 users and 2,473 page views in February according to Google Analytics. The blog gets about 10X that now each month. The blog experienced this type of growth for Twitter followers as well going from 20 followers at the start of the year to over 580 by years end. Similarly, my free newsletter subscribers have grown from 179 at start of the year to over 2,300 at years end. Overall I am pretty happy with the growth of the Dividend Power blog.
I have learned that running a blog is hard work. It’s not as easy as some bloggers make it seem. There is the hobby level blogging, which does not take too much effort. But to gain scale and thousands of readers per month takes serious effort. Also blogging is not free and there are expenses that seem to grow as a blog grows. To help defray the costs I have added a limited number of advertisements and some affiliates. I am selective on who I work with as affiliates as I feel that they should generate value for my readers.
On Seeking Alpha, I now have 4,383 followers, which is not quite double from end of 2019. I am still in the top 10% of financial bloggers as tracked by TipRanks (an independent analyst tracking site). This ranking is only based on articles published on Seeking Alpha and does not include all articles on the Dividend Power blog.
Besides Seeking Alpha, Dividend Power’s content has been featured on ValueWalk, Forbes, Insider Monkey, MoneyShow, TalkMarkets, ValueWalk, and Yahoo Finance. My article on the Advantages and Risks of Dividend Growth Investing made the best of personal finance on Personal Finance Blogs. I was also interviewed on investment trends and featured as a top blogger on Sarwa.
The top 5 posts based on page views (as tracked by Google Analytics) is listed below.
The top five countries where my readers come from are in order from the United States, Canada, United Kingdom, Germany, and Spain.
The top five cities where my readers come from are in order New York, Chicago, Los Angeles, Houston, and Dallas. In reality, I have more readers where the city is not known but I am not counting that one here.
Final Thoughts on 2020 Year in Review
This is my second year in review. I did my first one last year where I talked about the U.S. stock market in 2019 and of the Dividend Power blog in 2019. Overall 2020 was a good year from the perspective of the stock market as was 2019. Those that stayed invested have done well despite the ups and downs of the market. If you are out the market you may miss the worst months but you may also miss the best months. Professional investors are not able to do it consistently and it is unlikely that small investors can. But slow and steady and buy and hold can work over time.
Thanks for reading the 2020 Year in Review and the Dividend Power blog!
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If you are interested in an excellent resource for DIY dividend growth investors. I suggest reading my Review of The Sure Dividend Newsletter. Note that I am an affiliate of Sure Dividend.
If you want a leading investment research and portfolio management platform with all the fundamental metrics, screens, and analysis tools that you need. Read my Review of Stock Rover. Note that I am an affiliate of Stock Rover.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.