In December, all the broad equity indices reported a strong month, with the Nasdaq leading the way +5.65%. The MSCI ACWI (ticker: ACWI) was +4.69%, S&P 500 +3.71%, and the Dow Jones Industrial Average +3.23%. For 2020, of these indices, the clear leader was the Nasdaq gaining +43.64%. The S&P 500 and MSCI ACWI Index finished the year similarly, +16.26% and +16.34%, respectively. The Dow Jones lagged the other benchmarks but still managed a +7.25% return for 2020. Year-end performance for the MSCI ACWI ex-US Index (ticker: ACWX) was +10.29%, and the MSCI Emerging Markets (ticker: EEM) finished +17.02%.
Under the Hood
The top three performing US sectors for 2020 were:
XLK (technology): 43.62%
XLY (consumer discretionary): 29.63%
XLC (communication services): 26.90%
The three US sectors that lagged the most in 2020 were:
XLE (energy): -32.67%
XLRE (real estate): -2.18%
XLF (financial services): -1.74%
Notable investment style performances in 2020:
IWF (large cap growth): +38.25%
MTUM (momentum): +29.86%
IWM (small cap): +20.03%
IWD (large cap value): +2.73%
What to look for in 2021
Continued increases of COVID infection rates and the distribution of the vaccine have a considerable influence on the sustainability and strength of the economic recovery; further viral outbreak and delays or mismanagement of the vaccine roll out could bring about elevated levels of market volatility
Still need to be mindful of the potential of long-term effects related to small business failures, corporate bankruptcies, and higher debt burdens, all of which could hamper the recovery
What we heard from clients
Q. "How should I put additional money into the market? Should I wait for a pullback?"
A. Waiting for a pullback is not a good or reliable strategy. Since 1965, there have only been eight "crashes" of 20% or more. That is about one every seven years. A lot of stock market appreciation can occur in seven years, and a 20% pullback likely won't even get you back to the levels the market was at when you started the strategy.
It is also an emotional struggle to wait for a large pullback. When it finally occurs, everyone is running for the exits, and to buy the dip at that moment can be difficult when it looks like the world is ending. Further, living your life waiting for the world to end to buy stocks is not a great way to go!
Finally, the data suggests it just does not work. A couple of years ago, Sam Lee looked at what the returns would be in a buy-the dip-strategy, and the results far underperform a buy-and-hold strategy. If you want to put money to work, do not be afraid of all-time-highs, as they typically attract more buyers and stocks that are going up tend to keep going up. Check out this chart from Michael Batnick.
Data source: Koyfin