The world might be waiting on a Covid-19 vaccine, but thanks to policy booster shots, the stock market ended 2020 seeming to be largely immune from the contagion that still threatens Main Street businesses.
It might be hard to recall now, but 2020 started off with an economy full of potential: The Dow Jones Industrial Average was on track to break through the 30,000 threshold and the unemployment rate fell to 3.5 percent — the lowest in more than half a century. But things were already starting to unravel as an ominous viral pneumonia worked its way around the globe.
The Dow closed at a record high of 29,551 on Feb. 12 — then the patient took a turn for the worse. On March 9, 12, 16 and 18, circuit breakers designed to halt trading if the S&P 500 dropped by more than 7 percent kicked in when markets plunged. The market hit its nadir on March 23, with the S&P closing just above 2,237 and the Dow Jones a fraction below 18,592.
The Federal Reserve issued a flurry of announcements detailing emergency measures it was undertaking to backstop a number of behind-the-scenes markets, pledging to buy bonds and keep interest rates near zero, as an event that began as a public health crisis threatened to metastasize into a financial crisis.
On March 27, President Donald Trump signed into law the $2.2 trillion CARES Act, a rare act of bipartisan Congressional collaboration that provided enhanced unemployment insurance payments, forbearance on debts, suspensions of foreclosures and evictions, loans and grants for small businesses and payments of up to $1,200 for individual Americans.
The enormous, multitrillion-dollar scope of the rescue efforts along with the speed of implementation steadied the economic underpinnings of the market, and assisted in calming investors.
“I think the original bailout had a huge impact on the market. I believe without that package, we would not have bounced back,” said Joseph Heider, president of Cirrus Wealth Management.
In the ensuing months, a sharp — and for many, maddening — bifurcation took place as Covid-19 swept through the country in waves of mounting severity. The stock market clawed back its early-2020 gains and more, with the Dow Jones soaring above 30,000 for the first time in November.
On the ground, however, the economic picture looked far less celebratory for millions of American families. “There's definitely a difference between what’s happening in the market and what’s happening in the real economy,” said Charlie Ripley, portfolio manager and senior investment strategist at Allianz Investment Management.
The unemployment rate receded from its April peak of 14.7 percent, but remained elevated, particularly for Black and Latino workers, whose November unemployment rates were 10.3 percent and 8.4 percent, respectively.
Even as the personal savings rate soared, bolstered by expanded unemployment benefits, forbearance programs and a sharp contraction in the service economy due to shutdowns, half of American families lost income as a result of the pandemic. More than two in five of those had not recovered that lost income as of December, according to a Bankrate.com survey. The losses were concentrated among the poorest Americans, who also anticipated the impact of longest duration: 41 percent of respondents with household income below $40,000 said their income would either take more than a year to recover, or would never recover at all.
“I think people were really shocked that the stock market recovered so well while the economy was doing so badly. But capital markets are a very cold, emotionless thing.”
Mitchell Goldberg, president of ClientFirst Strategy, said technical features of the way the major stock indices are designed accounts for much of the baffling divide between Wall Street and Main Street.
“The way the market mechanics work, the S&P in particular, is designed to show the performance of the biggest stocks, not to reflect the performance of the economy,” he said. Both the S&P and the tech-heavy Nasdaq are market-cap weighted, meaning that the bigger the company, the more impact its stock value fluctuations have on the performance of the index as a whole.
There were a couple of additional factors driving stocks higher in 2020. Goldberg credited the introduction of fractional shares and commission-free trading platforms like Robinhood with generating interest among a new, often younger crop of retail investors. The Federal Reserve’s interventions also kept fixed-income returns very low. Investors — whether big institutions like pension funds or just workers accruing retirement nest eggs in IRAs — had few choices other than equities to seek out meaningful returns.
As 2020 drew to a close, investors had two new reasons to breathe a sigh of relief: Certainty about the outcome of the presidential election, and good news on the Cover-19 vaccine front. The stock market always looks forward, and analysts said this is driving loftier valuations — even as politicians like President-elect Joe Biden and public health experts warn of a grim winter for the country.
Goldberg acknowledged that this disconnect can be frustrating, even alienating for the many Americans wondering what happened to their jobs, their savings accounts and their financial security.
“I think people were really shocked, and a lot of people were somewhat angry that the stock market recovered so well while the economy was doing so badly,” he said. “Capital markets are a very cold, emotionless thing.”