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Lessons from the steepest market drop in history and the outlook for 2021.

If there was ever a case study to be made regarding the futility of short-term market predictions, 2020 would be it. In December 2019, Barron’s asked 10 strategists to predict where the S&P 500 would end 2020. All predicted the year would close out between 3,000 and 3,500. All 10 underestimated and the S&P 500 ended the year at 3,756. Imagine what they would have predicted had they known in 2020 we would also be dealing with the greatest global pandemic in 100 years.

Barron’s also asked 10 strategists to predict where the 10 Year Treasury would end 2020. All predicted the year would close between 1.5 and 2.2% – a prediction that meant poor performance from bonds. All 10 overestimated and the 10 Year Treasury ended 2020 at .92%. In 2020, bonds soared, beating nearly everyone’s expectations.

2020 was a recipe for market disaster: a pandemic, social conflict, a highly contentious presidential election, natural disasters from coast to coast and a few other negative surprises along the way.1

Those who missed the recovery are reluctant to invest as markets are now, once again, at all-time highs. The good news is that the market actually does better after it hits all-time highs. Historically, it’s been impossible to call a bottom, but once markets recover, they tend to enjoy quite the honeymoon period. In fact, over the last 30 plus years, an investor would have realized better returns had they invested at all-time highs rather than on any random day.

Now, I can’t put a graph like that up without noting that I simply think it’s a statistical fluke. The case to be made here isn’t that investing at all-time highs is better than investing during any random period, but rather investing at any time generally works out for the disciplined investor.2 The market actually hits an all-time high every 19 days! In other words, all the time. Get used to investing at those points, or you simply can’t continually invest at all.

2020 was a reminder that it is time in the market, not timing the market, that ensures the best probability of a good outcome.

At Creative Planning, we did what we promised you we would do in market turmoil. For clients with tax opportunities, we seized them, and we did it during the market’s steep drop. For those with opportunities to sell bonds and buy stocks, we did that, and we did it during the market trough. We did our best to keep you informed, engaged, and most importantly, invested. While studies coming out show many investors panicked and sold near the bottom, with the market seeing massive outflows in March and April, over 99% of our clients stayed invested and allowed us to buy into the weakness, take advantage of tax opportunities and continue investing. For most of our clients, their portfolios ended the year with significant gains, but with losses on their tax return: few years present the opportunity for real gains and tax losses at the same time.

So, where do the markets go from here?  Of course, the answer is, no one knows.3 BlackRock, the world’s largest asset manager, thinks international and emerging markets stocks will outperform U.S. stocks and that small stocks will outperform large stocks.

Asset return expectations and uncertainty

Source: BlackRock Investment Institute, November 2020. Data as of September, 2020.

Vanguard also expects small stocks to outperform large stocks and international stocks to outperform U.S. stocks.