2020 has been a wild year for everyone, including investors.
The biggest economic shock in modern history, coupled with the biggest fiscal and monetary policy response in modern history, resulted in a large decoupling between stock prices and their underlying fundamentals, such as earnings.
Disney stock (a member of the S&P 500, Dow, and C Fund) sums up 2020 very well. Here’s the chart, where the black line represents Disney’s share price, and the blue and orange lines represent what Disney’s earnings are doing:
Disney’s earnings collapsed vertically downward to levels not seen in over a decade, while their stock price broke out vertically upward to new highs. Their physical properties, such as theme parks and cruise ships, have been heavily impacted by the reduction in travel related to the pandemic, and they have 32,000 planned layoffs. Meanwhile, their virtual properties, led by their new Disney+ streaming service, acquired members at a much faster rate than previously forecast. Analysts on average expect the company’s earnings to return to 2019 levels by 2023. If there’s a single stock that sums up 2020, Disney is certainly a leading candidate.
If we zoom out, we can see this happening on a bigger scale. This next chart shows the Wilshire index in blue, which represents most US stocks and is kind of like the C Fund and S Fund combined, and shows the total number of employed persons nationwide in red:
After the early 2000s recession, jobs recovered to new all-time highs before the stock market did, and both took a number of years. After the 2008/2009 financial crisis, the stock market recovered more quickly than the jobs market, but again, both took years to reach new highs.
In the 2020 pandemic crisis, the stock market fell by a smaller percentage and rebounded back to new highs within months, while the job market has only half-way recovered, and the pace of job recovery continues to slow.
There is a lot of euphoria in the market. In particular, trading volume at online brokers (mostly representing small individual retail traders) tripled this year:
This explosion in trading activity didn’t happen after the 2009 market bottom at all. The last time we saw something similar was from 1998-2000.
Rather than get caught up in the hype, investors would do well to stick to an investment process and ensure that their portfolios are suitable for their unique financial needs.
TSP Lifecycle Funds often represent the best way for investors to dollar-cost average into the market and minimize human error. They contain US stocks, foreign stocks, and a variable amount of bonds, based on age, and automatically rebalance themselves back to the target allocations.
Besides that, investors can further diversify with an IRA or other brokerage account as well. Commodity exposure, precious metals, emerging markets, individual stocks, digital assets, or other things outside of the traditional stock/bond portfolio, can add some uncorrelated opportunities, and investors have more flexibility in these types of accounts.
But a key thing is to make sure that any investment is based on reason rather than emotion. All sorts of strategies can work, as long as you don’t get caught up in the hype, buy market tops, sell market bottoms, and invest with the crowd and without a plan.
Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.