January 04

2020 – The Last Mile

black-swan-2020By David Nelson, CFA CMT

Facing the second Black Swan event in 12 years the pandemic of 2020 pushed investors to fear more than just the loss of money. Jobs are a casualty of any economic downturn, but the pandemic of 2020 also robbed our way of life and tragically for some, their lives.

Bear markets followed by bull markets are not uncommon but the speed with which 2020 unfolded gave investors little time to react and even less to digest emotionally what was taking place. It took just twenty-three trading days from the February peak to fall (-35%) to the March 23rd bottom. The 71% recovery that followed pushed the S&P 500 to another end of year record.


In the middle of a 31% GDP contraction, rising Covid deaths and record unemployment, investors who had just moved to a risk-off capital preservation mindset were faced with the impossible task of turning on a dime expected to flip the switch back to risk-on.

Maybe economists, AI, algos and even portfolio managers can be expected make those calls but real people whose future depends on the capital at risk needed to take a breath, look at the playing field and make decisions on probability outcomes as well as their personal financial needs and goals.
The barometer of your life and financial well-being is not the S&P 500. In the long run what you did or didn’t do during the depths of the crisis matters less than what you do going forward. If you find yourself under invested start to scale back in. The next pull back is unlikely to be anything like we saw in 2020. Use it as an opportunity. 

The pandemic left the country emotionally and financially scarred. The $Trillions added in government debt along with a still expanding Fed Balance sheet speak volumes as to what it took to keep equity markets afloat. It wasn’t just stocks that gave investors pause. (LQD) iShares Investment Grade Corporate Bond ETF fell close to 22% during the March panic. (TLT) iShares 20+ Treasury ETF after initially jumping higher as a safe haven took a 22% haircut as investors fled to cash. Even Gold failed to live up to its history as a safe haven asset class.

Markets were quick to discount a positive outcome believing science would eventually come up with a vaccine and or cure to this dreaded disease.
With the help of $billions from operation “Warp Speed” the drug industry often a target because of rising drug prices delivered a vaccine in record time. With several vaccines successfully meeting the end points of their trials, millions around the world are being vaccinated against COVID-19.
The Last Mile
Of course, the problem now isn’t the lack of a vaccine but the logistical nightmare of getting it out to the millions needed to achieve what we hope will be an eventual herd immunity. Buck passing is alive and well in Washington and in every state capital. At least as reported in the Wall Street Journal the federal government is pushing the task of distribution to the states who in turn are passing it to the local communities. It doesn’t take an MBA in supply chain management to understand that every branch of government is going to have to be involved and like it or not will have to coordinate with each other. I expect mistakes at the beginning of any untried venture. The only thing that matters is how quickly we adjust to correct them.

The federal government needs to invest as heavily in the logistics rollout as it did to bring about a vaccine in record time. State and local government need to come up with detailed plans on how to distribute and effectively go “the last mile.” The telecommunications industry faced a similar challenge years ago delivering fiber optic solutions all the way to the end customer. It’s one thing to rollout a national fiber network but some of the biggest challenges are faced getting that fiber cable to your doorstep completing “the last mile.”
Markets are a forward-looking mechanism and to date have obviously discounted a lot of good news pricing in a near perfect vaccine rollout and the economic recovery that should follow. Anything thing that disrupts that timetable will be paid for with lower equity prices.
We’ve stumbled out of the gate on the delivery. How quick we adjust in the next couple of weeks will determine where stocks trade at the end of the first quarter of 2021. President elect Biden has said we will deliver 100 million doses in the first 100 days of his Presidency. Dr. Fauci calls that a realistic goal.
If you’re looking for a barometer on how good or bad the vaccine rollout is going, look no further than the performance of large cap secular growth vs the rest of the market. If the roll out proceeds on schedule the economic data that follows will support the pro-cyclical recovery we’ve seen off the bottom. If it doesn’t or something worse like a Covid variant resistant to the vaccine arrives, markets will discount the news quickly forcing investors back into the mega cap stocks that protected them during the crisis.
Investors have a lot on their plate as we kick off 2021. ISM Manufacturing hits Tuesday and payrolls hit at the end of the week not to mention 2021 marks the beginning of a Post BREXIT Europe.