By Daniel Campbell, CFA

If I told you that we’d have a partial breakup of the European Union, a contested U.S. election, an economic contraction, and a global pandemic over the course of a year, would you expect the stock market to be up or down? Most of us might guess that the markets would be down (probably significantly). Few may have predicted that the markets would continue to set record highs. But that was 2020: a year of the unprecedented. Britain left the European Union, the first country ever to do so. The U.S. election was hotly contested, bringing out a record number of voters. And the defining event of 2020 – a global pandemic – upended normal life. Best-case scenario, it only changed the way we work, travel and connect with family and friends.

While we may have cheered the end of 2020, the occasion also offers an opportunity to reconcile the many and perhaps disparate events of last year. For instance, despite that economists widely expect the economy to have shrunk in 2020,1 the U.S. stock market posted strong positive performance for the year. Large growth companies, like Microsoft, Apple and Amazon, did exceptionally well as the pandemic created more demand for their services. Value stocks, which are companies with a low stock price relative to their earnings or accounting book value, performed sluggishly as investors tried to process how retail, food services and entertainment will look on the other side of the pandemic.
Uncertainty around the pandemic also scared many investors into selling equities and buying U.S. Treasury bonds. The Federal Reserve committed to keep the overnight lending rate low until we see average inflation closer to 2%, and as a result, yields for high-quality Treasury bonds have stayed near record lows. This was a big tailwind for fixed income returns this year, but it also means we need to be ready to accept lower fixed income returns going forward. Meanwhile, stock performance outside the U.S. was basically flat, and to the surprise of many, emerging market stocks turned in positive performance for the year.
All of this will be reflected in your portfolio’s performance. Every stock fund you own has purchased shares in hundreds, if not thousands, of companies, and they are set to benefit or be impaired by these global trends. For example, funds owning more large technology stocks could be some of your best performing investments and funds owning value stocks could be some of your worst performing investments. 2020 reminded us that it is not only impossible to predict what’s going to happen next, but also extremely difficult to know how those events will affect the stock market. That’s why we’ve built you a portfolio to meet your specific, long-term financial life goals, and also why that portfolio owns thousands of stocks across dozens of countries. Going into 2021, stock prices now reflect the market’s expectations for how companies will continue to weather COVID-19 and the changing business landscape.
Whatever happens in 2021, know that we have designed your portfolio to benefit in some amount from every trend, so you can focus on what matters most to you instead of worrying about which stocks are benefiting most from the market’s latest reflex.

1Federal Reserve Bank of Philadelphia, Fourth Quarter 2020 Survey of Professional Forecasters

©2020 Buckingham Wealth Partners (Buckingham Strategic Wealth LLC and Buckingham Strategic Partners LLC, collectively, Buckingham Wealth Partners)