I.                 A Remarkable Year

To put it mildly, 2020 was a remarkable year. The scale, intensity, novelty, horror, and ongoing nature of events make the typical end-of-year recap and reflection exercise feel a bit tenuous.  

Amid the turmoil, one theme jumps out: cognitive dissonance – the mind’s ability to hold two seemingly inconsistent ideas.

1. Mass business closures and unemployment … stocks rose.

2. Covid cases climbed all year. Stocks ended at all-time highs.

3. During a bear market, the most expensive stocks – especially tech – fared the best.

4. In one word, politics. And, you guessed it, stocks went higher. 

These outward contradictions point to a couple lessons.

First, 2020 was an all-time example of the link between returns and risk. We endured a daily onslaught of terrible news, social isolation, and community suffering. Many who lacked discipline, perspective, and a plan did not remain investors. Those that did were rewarded.

Second, 2020 should humble investors from drawing direct lines from the news or their lives to stock markets. Most expect the market narrative to match their worldview. Often, this approach allows fear to drive action. There are too many variables with too much unpredictability, uncertainty, and potential bias for anyone to reliably draw these lines.

Even with perfect foresight, forecasting is treacherous. Imagine in January someone showed you all of 2020’s headlines. How many would have abandoned the market, let alone abandoned civilization?   

For us, contradictory impulses peaked in March. Amid the worst, most volatile markets we’ve seen and a uniquely scary world with terrifying uncertainty, our strategies demanded that we sell bonds and buy stocks.

This was an all-time example of theory vs. practice. Theory says, “buy low.” In practice, this did not feel great. Nonetheless, a rules-based strategy requires consistency especially when it’s hard. While we caught some timing luck, March’s trades demonstrate the power of systems and structure for investors.  

Experts will study, discuss, and try to make sense of 2020 the rest of our careers. The following charts tell some of the story.   

An Amazing Recovery

The weeks following February 20 saw the quickest 30% U.S. stock (S&P 500) decline in history, and no one had trouble understanding why.

The Great Financial Crisis and the Tech Bubble were difficult to grasp. Even in hindsight, no one knows precisely why stocks fell when they did. During the GFC, the government’s response was also confusing – it effectively gave money to banks to keep them solvent and encourage lending.  

Here, the catalyst was obvious, and the remedy was too. The government flooded consumers with money. After a 33.9% decline, the following months saw the fastest bear market recovery in history.  

The scale of the Federal programs can be hard to fathom. In the next chart, see the gargantuan size of the March CARES Act – more than half of 2019’s total federal spending! 

Take a step back and 2020 looks like a microcosm of long-term market trends. The next chart shows 2020 returns for stocks, bonds, and cash.

Those unwilling or unable to accept risk earned nothing. Bonds provided mostly steady returns and stabilized portfolios during March. Stocks produced drama and heartburn and ultimately paid investors for staying in their seats.

Unfortunately, many investors exited mid-ride. The next chart shows how much cash investors horded during the spring.  

There were good reasons to go to cash, particularly for those whose livelihoods were threatened.

“The most important quality for an investor is temperament, not intellect.”

-Warren Buffett

Yet, some of the rush was an attempt to time the market i.e. wait for the dust to settle. Here, that reflex coincided with a meteoric bull market. The connection is rarely this clear and immediate, but here it is – the market paid investors who stayed patient and accepted risk.  

Winners and Losers

The pandemic drove market disparity. The shutdown, medical crisis, and social distancing benefited some businesses and harmed others.

BEW’s story is representative. We moved our internal communications to Microsoft Teams, our phone system to RingCentral, our meetings to video, and most paperwork to e-signature systems. We still prize a collaborative, office-centric culture. At the very least, the work-from-home (WFH) experience made us value office space a bit less.  

The below chart shows post-Covid returns for WFH technology purveyors. The green line shows depressed commercial real estate investment returns.

There was much speculation about biotechnology stocks. Interestingly, vaccine and therapeutic success have not correlated with returns. Unlike WFH, anticipating the real world did not lead investors to the right place.   

Conversely, BEACH stocks (Booking, Entertainment, Airlines, Casino/Cruise, Hotels) suffered from a near total decline in revenue. Vaccine news has helped in recent months, but most remain below pre-Covid levels.

Simply Stunning

A 2020 recap without Tesla seems lacking. We have no special thoughts on Tesla’s stock price. Mostly, we share in amazement at its year – up 743%.

The table shows a recent Tesla milestone. At the time of writing, it is the world’s sixth largest company at over $800 billion, despite profits a fraction of the other top ten firms. This is representative of a broader trend – investors paying a steep and increasing premium for future expected profits. This trend bears watching.

Our final chart would qualify as chart of the year in a normal year. For a day in April, the price of oil traded at a negative price. Effectively, demand dropped so quickly that people had trouble offloading their oil contracts. This was a technical quirk and the price quickly recovered.

Before 2020, no one thought a negative oil price was possible. The lesson for investors is – as much of 2020 taught – never say never.

Happy New Year

We have not mentioned foreign stocks or bonds, both of which also have fascinating stories to tell. We expect to discuss both in coming commentaries.

If you would like to discuss how your portfolio performed in 2020 and/or would like to update your financial plan in the New Year, please reach out.

We end by echoing the message we sent on New Year’s Eve. We wish everyone a healthy, happy, peaceful, and prosperous New Year.

Cheers to 2020. We hope there is never another year like it.

II.                 CARES Act 2, Tax Forms, & 2021 Retirement Plan Updates

Just before Christmas, Congress passed a second stimulus package with similar features to March’s CARES Act.

One of the package’s main features is a $600/person relief with phaseouts based on a household’s income (see below).

Other provisions include:

• forgivable loans for small businesses

• a $300 above-the-line charitable deduction for 2021 cash donations

• 11 weeks of additional $300/week unemployment benefits

• a permanent 7.5% out-of-pocket medical expense floor for deductions

Unlike the March CARES Act, there was no suspension of 2021 Required Minimum Distributions (RMD) from IRAs.

Tax Forms for 2020’s IRA Repayments

March’s CARES Act waived 2020 RMDs and allowed people to repay already-taken 2020 distributions back to their IRAs. We helped clients do this to reduce taxable IRA distributions.  

Schwab has started issuing Tax Form 1099-R which reports 2020 IRA distributions. However, repayments are not reflected on Form 1099-R. In May, Schwab will issue Form 5498 that will show the repayment. Of course, May is after most have filed 2020 tax returns. We will contact clients who need to inform their tax preparer that they repaid their RMD. 

2021 Retirement Plan Contribution Limits

The new year does not bring an increase in 401(k) employee or IRA maximum contribution amounts. They remain $19,500 with a $6,500 catchup contribution (if you are 50+) for 401(k)s and $6,000 with a $1,000 catchup contribution for IRAs.

Employer contribution limits did increase by $1,000, so SEP IRAs and Deferred Compensation Plans now have a $58,000 limit.

III.               Welcome Theresa Syquia

Hot on the heels of November’s announcement that Chris Hughes, CFP® had joined BEW, we welcome another new team member – Theresa Syquia!

Theresa joins BEW with impressive industry experience. She spent the last fifteen years as a Vice President and Trust Officer at a couple of large financial institutions in San Francisco.

Theresa has an M.B.A. from Columbia University Business School and a B.S. (cum laude) in Business Administration from University of the Philippines.

Theresa enjoys reading books, watching movies, and acting as a sous chef / official taste tester for her twin sister, who is a professionally trained baker.

Welcome Theresa!