2020 proved that you can never really predict what’s going to happen in the stock market or the economy. As we all remember, there was a flash of panic in March due to the Covid-19 pandemic but things quickly recovered as central banks around the world printed trillions in various reserve currencies, which went to businesses, people and also the financial markets. The various stock indexes, the Dow, the S&P 500 and even the KLCI, finally ended the year higher than it started.
Recession Worries Realised by Covid-19 Pandemic
We had some worries in 2019 that a recession was looming when the US bond yields started inverting in March 2019, which had been a reliable indicator from past history. This then prompted the US Fed to cut their rates from 2.4% in July 2019 to 1.55% in November 2019. The same thing happened in Malaysia when the Bank Negara cut the OPR from 3.25% to 3% in May 2019. Gold price started to rise after being in a 5-year slumber. Everyone was super wary that something bad was going to happen to the economy but no one knew what the trigger would be. By the start of 2020 however, the gloomy outlook dissipated and the US Fed was confident enough to start raising their rates again at the end of January 2020.
This made the crash starting in February 2020 quite spectacular because no one saw how fast things unravelled as various economies shut down to ‘flatten the curve’ of new Covid-19 cases. From a high of 3,393 in February 19, the S&P 500 crashed 35% by the end of March. The Dow did slightly worse with a 38% drop. The KLCI lost 20% in the same time period. The US officially went into recession in the second quarter of 2020.
It was a stomach churning moment but this was also a very rare opportunity to buy up stocks at cheap valuations.
Lessons from the March Crash
The lesson to be learnt is that if you’d panicked and sold out in the darkest days of March, you would have missed the amazing recovery in stocks as central banks printed money by the trillions. Holding was better than selling, especially if you are holding onto a broad and simple index based ETF like one that mirrors the S&P 500. And buying during the panic was better than holding and sitting idle.
My mistake was in thinking that the recovery with stocks will stretch out at least a year as with crashes in the past. I thought there will be plenty of time to slowly buy into recovering stocks. The speed of recovery had caught me unaware as the buying opportunity for the S&P 500 index based ETF was all over in about 3 months.
Although the various indexes have recovered quite a lot by June, the recovery of the individual stocks that make up the indexes vary substantially. In the US, tech companies like Apple, Amazon, Alphabet and Microsoft powered the recovery of the US indexes while glove companies like Top Glove and Supermax did the same for the KLCI. Many other big names did not recover until late in 2020 which was when the Covid-19 vaccines started to be approved.
If I had a crystal ball I could say I should have bought Top Glove in April, sell them off in August and switch to Public Bank in November to maximize my gains. However such thinking is not practical as no one can time stock movements accurately all the time – you have to be lucky to buy it at the right time and lucky again to sell it at the right time. I would argue that buying either Top Glove or Public Bank 10 years ago, holding them through their ups and downs would have given a nice profit without the need for extraordinary luck.
The key lesson is that it is easier to profit by holding quality stocks over the long run than by trading in and out, despite the opportunities brought by a crisis like this pandemic.
I do not know how 2021 will turn out for stocks as all the optimistic scenarios have already been factored into the stock prices. Problems with the rollout of the vaccination, slow downs in the earnings growth of tech companies or increases in the US Fed rates can easily bring down the stock prices. We also shouldn’t forget that the world economy was generally slowing down in 2019 before the start of this pandemic.
At the same time, some people are speculating that the next decade will see a roaring stock market just like the 1920’s after the 1918 Spanish flu. We could have a possible cool down with the US-China trade war and perhaps some strong investments in green energy sectors that offset the declining investments in the traditional oil and gas sectors as the world faces the threats of climate change. ‘War’ on climate change like conventional wars, can increase the global GDP through investments and new spendings.