March 17, 2021

Year 2020 in Retrospect

2020 in retrospect

….It was a very difficult year !

Indeed, it was a very difficult year  (to paraphrase the song) for mankind, personal lives, relations,  business and the stock market.

Some Lessons 

We experienced an extreme shock, not witnessed since 1918, in early spring as the virus started spreading and led business activity ro be seriously reduced. The stock market reflected immediately the economic downturn. Technical issues in program trading and momentum trading exacerbated volatility during the ferocious market declines in March 2020.

A) Cash on the sidelines was valuable.

‘The market can remain irrational longer than we can remain liquid and even solvent’.  A panic and disequilibrium were created. Behavioral finance had a party.

Transmission of fear was self reinforced  and reflected in negative market behavior.

B) Black swans, unexpected negative very important shocks, exist and take place more often than implied by the normal distribution. The practice of continuous Hedging and its cost are always  open questions. However, they  have to be evaluated over a number of years to determine the optimal strategy.

C) The stock market continuously anticipates.  The consensus  looks forward in most cases efficiently. It forecasted very early the eventual end of the virus problems. Extensive research was undertaken in finding drugs, tests and vaccines. In the fight against the virus, Human  nature, the US market and Technology emerged as the ultimate winners. The issue of the disease is far from over but  anticipating the next phase provided great benefits and recoveries in patient portfolios.

D) During the recovery stage some commentators were lamenting the dichotomy of the economy from the stock market. They did not like the fact that they had panicked and sold. The practical result was  that market timers took losses and missed  again  the recovery phase.

E) Transitory factors in economics are not so important. Only Permanent  changes are relevant. Stock Prices reflect the present value of future earnings.  The Current earnings were indeed affected by the lock  down. However, the  most important part of the equation i. e.future earnings for the next 15 to 20 years were not affected very much. This fact explains the recovery of stock prices.

F) Volatility begets volatility. Extensive discussions took place on the possibility or not of a recovery and, in the case it happened, of its pattern. Letters of the alphabet were used to describe this process. Letter V was finally the most appropriate one   implying a swift recovery of the stock market. Pessimists lost again.

G) During the recent evolutionary process a new economy emerged based on communication.  Companies and sectors of the economy had different fates in this readjustment process. Working from home changed living patterns and the relative market performance of different sectors.

Reinforced Conclusion : stay mostly invested in the US equity market without attempting radical market timing. A soft touch of market timing and sectoral readjustments can be helpful and enjoyable  !

Best wishes!

Nicholas Ritsonis Ph.D

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