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Written by: David Lovell | Swan Global Investments
2020 is over.
The turbulent events of 2020 – mainly, the arrival of the coronavirus pandemic that abruptly shut down and redefined the world as we knew it – proved that market-moving events can be unexpected and incredibly damaging. In March, when people across the U.S. were forced to retreat to the safety of their own homes, markets collapsed and investors feared the worst.
Yet while 2020 is in the rearview mirror, many of its challenges remain. The stock market has clearly recovered, however, the national economy is still in disarray and the pandemic continues to rage on.
Here’s a look back at the year that was and the lessons we learned along the way:
The Wall Street and Main Street Disconnect - A Growing Concern
While the markets were up big for much of the year, millions of American people and small businesses were down for the count. President Joe Biden is inheriting an economy in which more than 10 million American workers remain unemployed, as many as one in six small businesses shut down in 2020 and women have left the workforce in record numbers.
Meanwhile, the S&P 500 closed out 2020 with a total return of 18.4% for the year while the overall economy languished. Big tech fueled much of the markets’ growth in 2020, as the remote work trend sped up the digitalization of everything from commerce to entertainment to education.
The disparity between Wall Street and Main Street is very real and that gap is going to be something the U.S. will be forced to reckon with even after the pandemic ends.
The Year of the Federal Reserve
The Federal Reserve came to the government’s rescue numerous times in 2020, taking a wide array of actions to stabilize markets and prop up the economy. The Fed’s intervention included slashing interest rates, purchasing massive amounts of securities and publicly urging Congress to pass trillion-dollar stimulus packages.
However, the level of intervention from the Fed that we saw in 2020 is not an indication of a healthy market and economy. The Fed’s drastic response to the global health crisis was necessary, but it is certainly not sustainable in the long-term. In 2020, Congress and investors essentially developed an unhealthy co-dependence on the Fed which some argue has led to higher inequality and distortion of financial markets.
Former FDIC chairwoman Sheila Bair wrote in a Wall Street Journal editorial earlier this month: “Capitalism doesn’t work unless capital costs something and markets don’t work unless they’re allowed to rise and fall. The corporate facilities may have originally been justified as extraordinary one-off interventions to help companies maintain operations, but they morphed far beyond this purpose, and distorted capital allocation.”
Investors Would be Wise to Guard Their Portfolios
In March, when markets crashed due to the coronavirus pandemic and swirling uncertainty that ensued, nobody was prepared. Although the markets swiftly rebounded and ended the year with one of the strongest finishes in history, many investors had received a sharp lesson in the value of being prepared for the worst.
The stock market is clearly not in sync with all of the struggles the U.S. is facing in the real world. However, investors can adequately prepare their portfolios for the unexpected while simultaneously seeking to participate in future market gains.
At Swan, we believe our hedged equity approach, the Defined Risk Strategy, is well-positioned to help investors mitigate risk and potentially preserve assets should the markets sell off again. By staying always invested in low-cost ETFs, our Defined Risk Strategy seeks to generate consistent long-term rolling returns while also limiting risk during major market downturns by remaining always hedged using long-term put options.
Portfolio diversification is a good first step, but products like Swan’s first-ever Hedged Equity ETF go a step further by applying an active investment approach with the goal of providing a smoother ride.
The strange, devastating and unpredictable year that was 2020 may finally be past us, but there are still many challenges that lie ahead. Millions of Americans remain unemployed, the economy is not yet back on track and the country is still suffering through the worst of the COVID-19 pandemic.
As the U.S. looks to forge a new path ahead in 2021, investors would be wise to learn from the trials and tribulations of 2020 and prepare accordingly.