Before the hammer blow of Covid-19 struck, Wall Street viewed 2020 as a year of positive economic metrics: The unemployment rate was 3.5 percent, a low that hadn’t been achieved in generations, and the benchmark Dow Jones Industrial Average was on track to hit the symbolically significant benchmark of 30,000.
For most of the first quarter last year, investors were more concerned about signs of fatigue being displayed by a historically long bull market such as the inversion of the yield curve, along with then-President Donald Trump’s China trade war and the pain that escalating tariffs had inflicted on the manufacturing sector.
“When I look back at 2020, we came off a really strong year for the equity market,” said Jeff Carbone, managing partner at Cornerstone Wealth. “Expectations of earnings were still high, but the economic data was showing that things were starting to slow. Then, all hell broke loose.”
As Covid-19 accelerated its spread across first Asia, then Europe and the United States, countries implemented travel restrictions; businesses, government offices and educational institutions shut down; outbreaks in major coastal cities stretched the capacity of hospital systems, and supply chain bottlenecks triggered shortages of everything from masks to milk.
Stocks plunged by more than 30 percent, with some declines so steep that they tripped circuit breakers. The so-called “fear gauge,” the CBOE Volatility Index, spiked to levels unseen since the global financial crisis. Against conventional wisdom, bonds dropped concurrent with stocks, and commodities were so hard hit that oil futures briefly turned negative.
Investing pros reflect on just how close the world’s largest economy came to a catastrophic tipping point. “Looking back from a market perspective, there are a few things that led to those moments being really scary,” said Keith Buchanan, portfolio manager at Globalt Investments.
Investors as well as policymakers grew increasingly alarmed at indications that a handful of obscure, but critical, markets that form the backbone of the financial system could be facing a liquidity freeze. There were real fears that a public health crisis could become a financial crisis.
Officials at the Federal Reserve were the first to move, promising first large guarantees, then open-ended pledges to backstop critical market functions. Congressional leaders and rank-and-file lawmakers swiftly pulled together what would become the first in a series of relief packages, including mailing out money directly to nearly all Americans, and setting aside concerns about the deficit in order to provide billions of dollars to businesses, unemployed workers and families.
“The Federal Reserve made the first steps of taking rates down to zero and being as accommodative as possible, but it would've been hard to imagine that our fiscal response was sending checks to Americans,” Buchanan said.
Sending direct payments to families was a sort of Hail Mary experiment, a policy solution borne out of desperation in the face of an unanticipated, uncompromising opponent. As significant as the decision was in the near term, Buchanan said the greater value it contributed to economic confidence was the sense that a precedent had been set — that if Congress could do it once, they could do it again. And again. “That was enormous, widening the scope of what could be undertaken from a fiscal standpoint… A notion that that kind of stimulus could be revisited is helpful for economic expectations going forward,” he said.
While it's incredible to see how quickly the recovery has happened, it’s still not fundamentally secure.
A mere three months later, the S&P 500 had bounced back to where it had started the year, and the market spent the rest of 2020 more or less on the ascent, buoyed in the final quarter of the year by a remarkable feat of medical science, as not one but multiple Covid-19 vaccines were authorized and produced.
However, 2020 also ended with the real unemployment rate hovering at close to 10 percent, a drop in women’s labor force participation and a growing number of small-business casualties, particularly in travel, restaurants and entertainment.
“You had a total dislocation between market conditions and economic conditions,” Carbone said. This chasm separating Wall Street from Main Street, described by policymakers such as Treasury Secretary Janet Yellen as a K-shaped recovery, continues to this day — and worries financial professionals.
“There's been a big bifurcation between white-collar people who are able to work from home, versus people whose jobs rely on real-world interaction, [and] we’re still in an environment that requires quite a bit of support for the affected sectors,” said Jon Burckett-St. Laurent, senior portfolio manager at Exencial Wealth Advisors.
The trajectory of the market today assumes that the recovery will continue apace and uninterrupted — an optimistic assessment that some acknowledges carries a risk that corporate earnings won’t be able to measure up to Wall Street’s rosy expectations.
“To an extent, equities have already jumped the gun, and the market is pricing things based on where we think they’ll be in 2023, not necessarily where we are now,” Burckett-St. Laurent said.
“it’s kind of incredible just to see how quickly the recovery has happened, but it’s not fundamentally secure because the data doesn't match up fully yet,” Carbone said.