Welcome to the 2020 edition of ‘the year in tweeted charts’: a reasonably concise overview of the year, with some eye-popping graphs. But, also, a useful exercise to improve my understanding of market dynamics and future investment decisions. Here goes…
The year started off well, with equities continuing their stellar run – the S&P 500 realized a return of more than 30% in 2019, remember – and rising 3% in the first few weeks of January. It seemed, therefore, that the longest bull market in history would last a little while longer.
If only we knew what was coming. There was an occasional mention of some new flu-like virus spreading in Wuhan, China, but outside Asia, people paid little attention. All that was about to change – very quickly.
In the first weeks of February, it became clear that SARS-CoV-2, the virus that causes Covid-19, was spreading rapidly around the globe and posed a serious, non-flu-like risk to public health. Draconian measures were taken in China, significantly restricting the personal freedom of many people, to try and contain the outbreak. This had an unprecedented impact on economic activity and mobility. The number of visitors arriving in Hong Kong, for example, fell to zero. In other parts of the world, however, little to no action was taken.
But this, too, changed rapidly as the outbreak developed into a deadly pandemic in a matter of weeks, forcing governments around the world to impose harsh lockdown measures, including the closure of schools and workplaces. As a result, equities plummeted into bear market territory at the fastest pace on record. Between 19 February and 23 March, the S&P 500 shed 34%. Equity indices in other countries hit hard by the virus fared even worse, with Italy’s stock market collapsing 42% and Brazil’s Bovespa down 45%.
The economic sudden stop caused massive disruptions in demand and supply chains. Commodity prices, including the price of oil, crashed. As a result, the spread on US high yield energy companies spiked to far above 2,000 basis points, reflecting an expected default probability of 40% for the sector as a whole!
The next chart is an interesting one as it reveals just how geographically fragmented the outbreak really was. On 31 March, when Europe was still in full lockdown and the US was only halfway through its first Covid-19 wave, China reported a manufacturing PMI of above 50.
After Europe, the Americas were also hit hard by the virus, causing a massive decline in economic activity. This culminated in one of the most bizarre things I‘ve ever seen on the markets: because of the total collapse in demand, the May crude oil future settled at minus USD 37.63 a barrel. There was simply nobody willing to take physical delivery of oil.
Meanwhile, economic growth forecasts were rapidly being adjusted downwards, with some very dark estimates as a result. For example, in April, economists expected UK GDP to shrink by as much as 13% in 2020, the worst downturn since 1709. The current estimate, by the way, is 11.2%.
The next chart is perhaps even more telling, as it shows the number of quarters of GDP lost for countries around the globe. ‘UNPRECEDENTED’. After Q2, Italy had lost 93 quarters, or almost 8 years of growth.
One of the most telling charts I have seen the last couple of weeks! Source: Bank of America https://t.co/DL7tNfb3Yw
As shown above, the economic sudden stop was accompanied by the fastest downturn in equities on record. In early April, the Bank of America Bull & Bear Indicator dropped to zero. At the time, the VIX Index was still above 50, after spiking to a record-level of over 80 in March.
But, as we’ve seen many times before, it’s often darkest before dawn. Those who dared to buy US equities in April are up almost 50% now. Global equities are up 33% in euro terms. So, while economic data kept surprising on the downside, providing many astonishing charts, including the one below showing how India’s services PMI tumbled to 5.4, equities embarked on one of their biggest recoveries ever.
The reason? The biggest joint fiscal and monetary stimulus since World War II. It’s the combination of the two which has led to the recovery. All other macro events, including the US elections, were little more than a side show.
Some market recoveries unfolded astonishingly fast. Owing to the massive acceleration of many technology-driven trends such as digitalization and online shopping, the Nasdaq reached a new all-time high as early as 8 June, before breaching the 10,000 level for the first time ever a day later.
While the recovery in equity markets was mostly driven by massive fiscal and monetary stimulus, limiting damage to the economy, other non-macro factors were also at play. The total collapse of bond yields meant that, on a relative basis, equities became the most attractively valued of the two since the 1940s. In addition, investor positioning remained cautious in the early part of the recovery, keeping massive amounts of cash on the sidelines at first.
However, as is the tendency during big bull markets, some exuberance started to emerge after summer. The performance of big tech companies in particular remained exceptional, enough for BCA to label the FAANGM (Facebook, Apple, Amazon, Netflix, Google, Microsoft) stock rally as the ‘mania’ of the last decade. We have yet to see whether this really is the case, but a great chart anyway!
The buoyancy has not been limited to equities. The yield on corporate bonds sank to record lows, with spread levels rapidly falling to below average as central banks expanded the universe of bonds eligible for purchase. And all this after a steady decline in corporate creditworthiness over the last four decades.
Central banks are buying massive amounts of corporate bonds, which creditworthiness has been declining for 40 years… twitter.com/i/web/status/1…
Yet, with extremely strong fiscal and monetary forces at work, markets had no alternative than to go up. By October, investors were increasingly pointing to equity market valuations as an important near-term risk. But without considering the fact that other asset classes were even more extremely valued and the incredible amount of liquidity that has been pumped into the financial system. Based on the relationship between US excess liquidity and the PE ratio of the S&P 500, equities should trade at much higher multiples.
Meanwhile, for bonds, it’s pretty much the same story. Extreme liquidity has translated into extreme yields. Hence, the total amount of outstanding debt with an effective yield below zero reached a fresh all-time high in November.
But while more than USD 17 trillion in negative-yielding debt is certainly noteworthy, November 2020 will be remembered most for being the best November ever for stocks and the best one-month equity market performance since 1987. This was all made possible by a series of favorable announcements on the development of a Covid-19 vaccine, starting on 9 November. On that day, Pfizer and BioNTech reported a much higher than expected 90% efficacy for their Covid-19 vaccine, lifting European stocks by as much as 7% during the day.
This brings us to December, with the S&P 500 up more than 14% year to date and the Nasdaq up an unbelievable 42%. Gold is up 23%, despite price pressure in recent weeks. Long-maturity bonds are also having another strong year, with double-digit returns. Paradoxical as it may sound, 2020 has been a pretty great year for markets.
Paradoxical as it may sound, 2020 has been a very good year for markets.
88% of asset classes up this year. Chart… twitter.com/i/web/status/1…
The list of positive 2020 returns includes bitcoin, which smashed through its previous all-time high of 2017 to reach heady heights of USD 24,000. Bitcoin has been the best-performing ‘asset class’ in eight of the last ten years. Interestingly, this time it was institutional interest that caused another breathtaking rally as the cryptocurrency lost its schizophrenic nature and ‘became’ a form of digital gold. Bitcoin’s place in ‘the year in tweeted charts’ is well deserved.
2020 was a truly historical year. And even though I’ve experienced two other big market collapses (the bursting of the internet bubble and the great financial crisis), this year is likely to stay with me much more vividly. Obviously, this has to do with the fact that this crisis has had not only a major economic and financial impact, but also a profound societal one as well. Never before had I envisioned walking around wearing a face mask and spending virtually all my time at home.
Fortunately, the vaccines will get us onto the path to a new normal, even though some things will, perhaps, never be the same again. For markets, ongoing stimulus – US Congress just signed another relief package – together with a vaccine-facilitated reopening of economies and societies will likely result in fresh all-time highs. If I’m wrong, I sincerely hope it will be with respect to markets and not to the return to a more normal, social world.