Financial advisers expect markets to stabilize after a volatile 2020

Last year was a wild ride in many ways. For stock market investors, the ride was positively gut-wrenching.

In February a year ago, the Dow Jones Industrial Average hit a record high. Unemployment was at 3.5%, and it seemed the economy was hitting on all cylinders.

A few weeks later, everything changed. Much of the economy shut down due to the emergence of the COVID-19 virus, unemployment skyrocketed and the stock market dropped more than 30% in a near free fall.

But it may have been the shortest market downturn in history. By the end of March, the markets began clawing back, and the year saw a remarkable rally, as the Standard & Poor’s 500 ended 2020 with an overall gain of more than 16%. After the market bottomed out in late March, the S&P 500 rose 68% by the end of the year.

This year’s performance should return to more normal results, says James Hagerty, a principal with downtown-based Bartlett Wealth Management. “In general, we would temper expectations.”

Last year, the stock market set new records despite a rampaging virus that led to high unemployment and an overall subpar economic performance.

This year, there is hope for an easing of the global pandemic as hundreds of millions of vaccines are scheduled to be distributed. A hefty economic relief plan is on the table, and that’s caused economic forecasts to tick upward.

Economists at Wall Street giant Goldman Sachs raised their estimate for gross domestic product growth to 6.6%. The firm says it expects unemployment in the U.S. to drop to 4.5% by the end of the year, meaning millions more people could be back at work. Interest rates are very low and corporate earnings are expected to be high.

Despite all these signs, it’s unlikely the markets can repeat the kind of performance they saw in 2020, says Michael Chasnoff, founder and CEO of Truepoint Wealth Counsel. “We’d be careful about a strategy that says what worked in 2020 is going to continue to work in 2021.”

“It would be the flip of last year, when the market did real well with bad conditions,” Hagerty says. “This year is shaping up to be a better year in economic performance but returns will probably be a third to a half of last year’s pace, and that would be a favorable scenario.

“People should not expect an encore,” he adds.

The wild ride of 2020 should have reinforced some basic lessons of sound investing, Hagerty says.

One is to avoid trying to anticipate market swings. “It’s very difficult to time the market; that’s one of the enduring lessons of 2020,” he says.

The spring crash was frightening, however, if investors had waited for months for the markets to fully stabilize, they would have missed a lot of upside.

 “If you’ve waited for conclusive signals that the economy is coming back, you’ve probably waited too long,” Hagerty says.

Warren Buffett, the folksy investment wizard known as the Oracle of Omaha, had a good quote that sums up advice about market timing: “If you wait for the robins, spring will be over,” he said during the 2008 recession.

“The market moves in advance,” Hagerty says. “The stock market bottoms out and begins recovering three to six months before the economy starts recovering. The stock market always leads.”

The other lesson that 2020 reinforced was to make sure financial assets are appropriately allocated in a balanced mix, Chasnoff says.

“There’s a wave of optimism over U.S. growth stocks,” he says. “We view the disproportionate returns in the U.S. growth side of the economy to be creating more opportunities on the value side.

“I’d recommend having a good balanced valuation between growth and value, large and small,” he adds.

Keeping an eye on the allocation among stocks, bond and cash, and then rebalancing if necessary, will help ward off the instinctive temptations to load up on stocks during a bull market or to sell them during a bear market, Hagerty says.

“It’s going to protect you against actively selling, but, more importantly, it will put you in a position to opportunistically buy when things are difficult,” he says.

No one can predict the future or when a market-shaking event such as a pandemic or financial crisis will occur. With the markets in record territory now, it’s a good time to establish a solid investment strategy to prepare for the next correction or worse, Chasnoff says.

“It’s a great opportunity if you don’t have a really well-established strategic investment plan in place with strong discipline,” he adds. “This is a good time to do that. It’s important to do now before the next big market-volatility event occurs.”

Hagerty cautions against looking to riskier tactics as a way to beat the market.

The risks involved in short selling, for example, became evident during the GameStop debacle. Some big investment firms had bet that GameStop shares would continue to fall, selling it short. But the company, which had struggled for some time, suddenly saw its shares rise from $18 to nearly $400 as some investors, seeking to make a statement and fueled by social media and online trading apps, bought the shares, driving up the price and causing the short sellers to lose out.

“It shows how dangerous short selling can be,” Hagerty says. “It can be very risky. This is not something that should be practiced by the individual investor.”

Another vehicle to be cautious of is “special purpose acquisition companies,” or SPACs, Hagerty says. These are companies that have no operations but were formed strictly to raise capital to buy a company and take it public. They’re also known as “blank check” companies.

SPACs were credited, or blamed, for driving the market for initial public offerings to new records in 2020. “These are companies without an existing business or a financial history that you can study,” he says.

How investors manage their assets usually depends on what their goals are, where they’re at in their careers and what they intend to do with their money, Hagerty says.

Someone in their 20s or 30s who is investing for the long-term, perhaps for retirement, may want to invest 100% of their savings in stocks.

For someone nearing retirement, or already retired, the allocation would be more conservative. “If you’re retired, you need to think more carefully about asset allocation,” he says. “It’s not all about growth anymore. You need reliable cash returns; you need some stability built in there.”

He suggests investors ask themselves questions that include: What are your specific circumstances and goals? Is it growth, is it income, is it a combination of the two? And just as importantly, especially in times of volatility, what is your risk tolerance?

While the stock market comes with risk, it has shown remarkable resilience following previous crises, Chasnoff says. “Over long periods of time, the markets are going to continue to reward investors, even following the next major decline.”