There is no doubt that everyone reading this commentary are thrilled that 2020 is now history. COVID-19 was obviously the dominating factor behind almost everything that befell the world over the past year. The death toll and economic destruction wrought by this pandemic is not like anything we’ve experience in modern history. Rather than rehash its impact which we are all too familiar with, we’ll look to see what we learned from it, and what some of the longer-term impacts may be.
We would argue that the biggest lesson from 2020 occurred on March 23rd. It was the day that most major stock markets bottomed, after a very short, but brutal pull-back. While many investors continued to run for the exits, we were cautioning investors that while the worst of the pandemic was yet to come, the stock markets would probably trade higher by years end. Why? Markets are forward looking, they do not care about the present, they only care about what the future holds. The markets had surmised that while the economic devastation may not have fully played out, they did expect that the pandemic would eventually be controlled, allowing economic activity to resume. Unfortunately, when one is in the eye of the hurricane, it’s difficult to make rational decisions. Having managed money for decades, we know that markets tend to bounce back after severe corrections, and thus try not to get sucked into apocalyptic scenarios disgorged by the media. Therefore, take away #1 is to never overreact to political, societal or economic events you believe will be short term in nature.
We all recognize the need for proper diversification to provide portfolio stability during extreme market volatility. For most individuals, the only way to provide some diversification to an all-equity portfolio is with the inclusion of bonds. While bonds offer very little from a yield perspective today, they do offer some down-side protection during market upheaval, or so we thought. Many investors today get their exposure to bonds through bond ETF’s. The expectation is that they will provide some capital appreciation when stocks are selling off. Unfortunately, during the most volatile period for stocks near the end of March, bond ETF’s themselves were trading at discounts to what their true values were. Rather than providing some capital appreciation during this period, they themselves were losing value. Therefore, take away #2 is that during extreme market volatility, bond ETF’s may not provide the downside protection investors have come to expect.
By all accounts, COVID-19 has accelerated the “work from home” environment by anywhere from 6-8 years. Whether this accelerates or reverses somewhat is hard to gauge, as some of the impacts will not be transitory, but rather will have long-term implications. What will be the impact on office real estate; what will be the impact on residential real estate close to city centers as people move out of down town; what will be the impact on airlines as businesses recognize that travel is not as much a necessity as before COVID (75% of airline revenue comes from business travel); what will happen to Movie Theatres as movie producers recognize they can make as much money by streaming a new movie on the day of release; will restaurants become smaller as their clientele become more comfortable ordering from DoorDash; and will shopping malls become a thing of the past as we become more adept at ordering on-line? While we won’t know the answer to any of these questions for several years, we do know that the environment going forward will not be the same as the environment pre-COVID.
Many of you are aware of how well the Kinsted Global Equity pool performed in 2020. Many of the US stocks in the portfolio benefited significantly from the changing environment. While none of them were purchased with expectations that a pandemic would ensue, most of them benefited from it. Companies like Zoom, Shopify, and Wayfair all benefited from the work from home environment.
The advancements in medical research and technology has grown exponentially fast. Due to these advancements, a vaccine was developed in under a year for COVID-19, something nobody would have thought possible just a few years ago. To put it into perspective, in 2001 it took a decade and $100 million to decode the human genome. Today, that cost has dropped to $1,000 and can be done in 24 hours. Take away #4 is that, as 2020 has shown, advancements in medical research may shorten the time between the appearance of new viruses and vaccines.
One of the biggest conclusions for us is how governments around the world stepped in to provide support to both citizens and businesses during these unprecedented times. While the need was obvious, the longer-term implications of “bigger government” will be felt down the road in the form of higher taxes and possibly higher inflation
So, what does classic rock have to do with investing? Billy Joel provided the ultimate response in writing the song “We didn’t start the Fire” - the song is an eclectic debrief of headline events during the mid to late 1900’s that were a cause of uncertainty, polarization, and mania. Let take a retrospective overview of historic events and their impact on the markets!