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Winter 2021 Commentary

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Outlook

The fourth quarter accelerated the market rebound that began in the spring, even as the COVID‐19 crisis worsened and we held one of the most contentious Presidential elections in recent history. For the year, the S&P 500 increased an impressive 18.4%. A fantastic performance in any year, but especially in a year such as this one that saw a huge drawdown in the index in the first quarter as the severity of the impact of COVID‐19 became apparent.

In the first quarter, as the virus quickly spread and cities and organizations began shutting down, the economic outlook suddenly looked extraordinary bleak, and the stock market reacted in kind. Over the course of a very chaotic four weeks, the S&P 500 shed 34%, in the process triggering “circuit breakers” on four separate occasions. This was the first time these safety measures have been triggered since they were implemented following the “Black Monday” crash in 1987.

*This graph is not intended to recommend any investment or investment activity.

Then, on March 23rd, the Federal Reserve and the Treasury came to the rescue with enormous stimulus measures that helped to ward off the worst of the potential economic consequences. Prior to the stimulus, strategists feared that unemployment could climb as high as 25%, a level not seen since the great depression. Instead, unemployment “only” rose to 14.7% and has since fallen to 6.7%, with improvements ongoing. The announcement of these rescue measures marked the bottom of the market’s decline. From those lows, the market climbed a whopping 68% through the end of the year and continues to rise as of this writing.

In addition to the improvement in the stock market and in the economy, an amazing and heroic effort by our healthcare complex quickly developed increasingly effective methods to treat the disease. Then, late in the year, there was the development and approval of two vaccines whose distribution has begun and is now accelerating. By focusing early vaccination efforts on the elderly population, who are at a far greater risk of becoming seriously ill, we should be able to greatly reduce the overall risk of fatality in the coming months. Additionally, the country at large has become accustomed to safety measures such as wearing masks, washing hands, limiting contacts, etc. in a collective effort to keep those most vulnerable safe. Given these advancements, strategists are becoming increasingly hopeful that once we get through the recent surge in cases, we will begin to see rapid improvements in infection rates and deaths by the spring with the hope that we might begin to return to normal once and for all by mid‐summer.

This sets the stage for what could be a very strong surge in the economy in the second half of the year. Not only will a return to normalcy have a positive impact on overall sentiment, but economists expect a bounce back in many of the hardest hit sectors of the economy, such as travel and hospitality. The oil and gas sector should also see a boost as travel returns to normal. There are also a great many projects and purchasing plans that were delayed due to the uncertainty caused by the virus. This pent up demand will likely bring a rise in purchasing and capital spending as the world returns to business as usual.

When the COVID‐19 crisis first came into clear focus, there was much debate about how the “shape” of the eventual recovery would play out. Optimists hoped for a “V” shape where the sudden drop is followed by a rapid recovery. Those less optimistic argued for a “U” shape where recovery follows a prolonged recession. Pessimists forecasted an “L” shape where the economy doesn’t recover at all. What appears to have actually transpired has been more like a “K.” Some business sectors and families have recovered very quickly, while others are struggling to survive. Tech companies and online retailers have done quite well, while travel and hospitality companies have seen very little recovery so far. Many professionals who can effectively work from home and have money invested in the stock market have come through this crisis better than ever, at least from a financial standpoint. In contrast, the impact on workers in the restaurant or hospitality service industries has been devastating. Many in the lower income ranks have lost incomes, face evictions, and have been thrown into dire financial situations, through no fault of their own.

The two major events that dominated investor sentiment for the year were the outbreak of the COVID‐19 crisis in the spring and the Presidential election in the fall. We spent a good deal of time reaching out to clients in the spring to discuss the impact of the sudden stock market collapse and what to do (or not do) in response. With a much different tenor, we also had many discussions with clients regarding the outlook for the economy and tax policy and the impact on their portfolios depending on the outcome of the election. In both cases, our answer remains the same; it is almost never a good idea to make sudden changes to your portfolio in anticipation of what might or might not happen.

Regarding the concerns about the election results, we find the following chart to be especially insightful. It shows the total return of the Dow Jones Industrial Average while either Republicans or Democrats occupied the Presidency and the total return for the entire period regardless of who was in office.

*This graph is not intended to recommend any investment or investment activity. Source: Charles Schwab

The key takeaway from this chart is not which party “scored” the bigger return, but the third bar that shows the enormous benefit to portfolio returns by just staying in the market the entire time, regardless of which party was in the White House.

Now that the November elections have been decided, the Democrats come away with control of the White House and both halls of Congress. However, that does not mean they’ll have the ability to pass everything they want without some old fashioned cooperation. The Senate is controlled by the narrowest possible margin and control of the House has tightened considerably. Without a clear advantage for either party, we are hopeful that a new era of bipartisanship will replace the highly polarized political environment that has been the norm for many years.

Speaking of politics, we would be remiss not to address the current political climate, especially in light of the events in Washington D.C. on January 6th. We hope that this will serve as a wake up call for the entire political complex that the current environment of extreme partisan warfare has gone way too far. For the sake of the country, the pendulum must swing back to a more civil and cooperative tone for governance that puts the needs of the country over all other priorities.

As we reflect on the past year, we are reminded that there is a powerful truth in investing that eludes many; “time in the market” is a far more reliable way to build wealth than “timing the market.” It has been proven many times that an investor’s best bet for good longterm investment results is to decide on a strategy for a well‐diversified portfolio and stick with it, even as markets move up and down. Attempting to time the market turns disciplined long‐term investing into short‐term speculation (or gambling). At best, market timing is a waste of time and energy. However, most often attempting to time the market damages a portfolio’s long‐term return potential, as the following chart suggests. According to the most recent DALBAR study, the average equity fund investor achieved a return only slightly better than inflation and far lower than simply staying put in the S&P 500 or a 60/40 or 40/60 balanced portfolio.

*This graph is not intended to recommend any investment or investment activity. Source: JPMorgan, DALBAR

2020 proved to be a textbook illustration for why attempting to time the market is a fool’s errand. It turns out that money invested at seemingly the worst possible times would have worked out just fine. Consider that money invested in the S&P 500 on February 19, which was the market peak before the COVID‐19 selloff, would have gained 10.9% by the end of the year. Money invested on election day would have gained 11.5% by the end of the year.

Our expectation for 2021 is for more of the same in the first half of the year; mostly positive returns with bouts of volatility. We are hopeful that once we move past the COVID‐19 crisis in the second half of the year, the economy will recover to pre‐crisis levels and advance from there.

Thank you very much for your continued confidence in our service and advice. If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience. Lastly, don’t keep us a secret. If you know someone who would like help planning for their financial future, we will be pleased to speak with them to see if we can assist.


Horizon Wealth Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.

Owen Murray, CFA
Owen Murray joined Horizon Advisors in 2005. As a core member of the wealth management team, Owen is principally involved in investment research and portfolio construction.

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