While 2020's awfulness in terms of the pandemic's impact on lives and livelihoods is clear, for markets, the picture was different: 2020 was a wild year, with COVID-related lockdowns driving a steep plunge into a bear market, followed by what Fisher Investments' research shows is a historically unusual recovery—both in terms of its speed and the categories that led. Here is a look inside this wild year in markets—and some investing lessons from 2020 to carry forward.
The year began placidly enough. After an excellent 2019 in which global stocks climbed 27.7%, markets began 2020 climbing 3.3% to hit multiple new record highs in the year's first 29 trading days.[i] Growth stocks—those that are less economically sensitive, trade at higher valuations and tend to prioritize re-investing profits into the business versus paying dividends or buying back stock—outperformed. In 2019, they gained 33.7% versus global value stocks' 21.7%.[ii] That also continued in 2020's opening days, with growth topping value, 6.4% to 0.3%.[iii]
Then, as Western governments began locking down their economies in response to COVID, the bottom fell out. From February 12 to March 23, global stocks fell -34.0%—history's fastest bear market (a typically prolonged, fundamentally driven equity market decline exceeding -20%).[iv] According to Fisher Investments' historical analysis, growth stocks ordinarily outperform value during downturns, as many fear the associated recession will wipe out (particularly smaller) value companies, due to their reliance on economic growth. So it was in 2020. During the brief bear market, growth fell -30.7%, outperforming value stocks, which fell -37.7%.[v]
Usually, value's outsized plunge after a long, grinding bear market tees it up to outperform in new bull markets, as fears of insolvency prove overdone. This isn't just Fisher Investments' view: Many know this history and expected value to lead after the COVID bear market ended. But in a 2020 twist, that didn't happen. Instead, growth stocks surged 81.4% from the bear market's March 23 low through yearend, trouncing value's 58.1%.[vi]
Why? Growth and value stocks tend to cluster in select areas. For growth, these sectors tend to be Information Technology, Consumer Discretionary and Communication Services—areas that meshed well with a socially distanced world. Meanwhile, value carries far higher weights in Financials, Utilities, Energy and Consumer Staples. Exhibit 1 shows you this by plotting the difference in sector weights between the MSCI World Growth and Value Indexes.
Exhibit 1: MSCI World Growth Minus Value, Sector Weights
Source: FactSet, as of 1/4/2020.
Exhibit 2 shows sector returns for all of 2020. As you can see, growth-dominated sectors cluster near the top of the return scoreboard. Value areas, especially Energy, got crushed.
Exhibit 2: 'Growthier' Sectors Dominate Returns in 2020
Source: FactSet, as of 1/4/2020. MSCI World Index sector returns with net dividends, 12/31/2019 – 12/31/2020.
Growth's outperformance before, during and after 2020's bear market may have caused its weight in your portfolio to swell. Perhaps you believe that is ok, as last year's returns demonstrate growth's superiority. But we think this would be a very dangerous line of logic. No style is permanently superior, and overweighting one to an extreme degree could mean you are very exposed to a reversal. To be clear: We aren't arguing a reversal is coming, either due to reversion from 2020's trend or any other reason. But proper diversification means you must have holdings in areas you don't expect to lead. That can be frustrating, but a core tenet in Fisher Investments' philosophy is to always know you could be wrong.
But 2020's growth and value divide highlight another key point worth considering: You could unwittingly be concentrating in suboptimal areas. Consider: As mentioned earlier, growth firms tend to pay smaller dividends than value, if they even pay any at all. Exhibit 3 shows this, ranking the 11 equity sectors from lowest to highest dividend yield on December 31, 2019 (to remove the pandemic's impact).
Exhibit 3: Growth Sectors Have Smaller Dividend Yields
Source: FactSet, as of 1/4/2021. MSCI World sector dividend yields on 12/31/2019.
Hence, if your strategy emphasizes dividends, you may unintentionally have a huge value bias, to the detriment of your portfolio when growth leads, like last year. Always remember: There is nothing special about dividends. They are merely one slice of your total return, which is price return and dividends.
Beyond this, we think 2020 also teaches the importance of looking beyond mere statistical relationships. Those thinking value would lead because it usually does after bear markets miss the peculiarities that made 2020 so unique. They miss that the bear market moved too fast to build outsized fears of value firms' insolvency. Without that fear, there was no relief when the bottom came. Instead, investors could see the huge headwinds confronting Energy from pandemic-driven weak transportation demand and nagging oversupply. They saw falling interest rates and heightened regulatory oversight of banks as headwinds to profits and returns for Financials. That context mattered to returns—and it is worth remembering as 2021 dawns.
[i] Source: FactSet, as of 1/4/2021. MSCI World Index returns with net dividends, 12/31/2018 – 12/31/2019 and 12/31/2019 – 2/12/2020.
[ii] Ibid. MSCI World Growth and Value Index returns with net dividends, 12/31/2018 – 12/31/2019.
[iii] Ibid. 12/31/2019 – 2/12/2020.
[iv] Ibid. 2/12/2020 – 3/23/2020.
[v] Ibid. 2/12/2020 – 3/23/2020.
[vi] Ibid. 3/23/2020 – 12/31/2020.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
