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December 28, 2020 | Investment Themes
The end of year holiday season is a time for celebration and reflection. For investors, they will no doubt be thinking about all the financial market volatility during the first three months, and what they did about it.
The pandemic created so much unknown and uncertainty that few would have expected the stock market to be where it is today. While there are a few days left in the year, the US equity market is up a very solid 14.7% year-to-date through Christmas Eve. Decades from now, will a new generation of young investors look at 2020 and wonder what all the fuss was about?
But for those who lived through it, we believe there are a trio of lasting lessons that will describe the COVID investing experience for years to come
Cash always comes first, and when markets are going haywire, it is the one thing everyone wishes they had more of. It is king, but the story is deeper than that.
More accurately, what investors really wanted in March 2020 was the ability to provide liquidity. Liquidity describes the ease with which an asset can be converted into cash. Cash is the most liquid asset—whereas something like real estate is illiquid—and those with plenty of cash on hand were in a great position.
Providing liquidity means taking this one step further and putting your liquidity to work. For example, when the market was selling off last spring, investors who traded liquid assets for riskier, illiquid assets were able to buy them at deeply depressed prices. Once the market stabilized and began turning around, this quickly became a very profitable investment.
After just a handful of months, investors who bought into equities ended up buying into the fastest market recovery in US stock market history. Lesson 1 on the power of liquidity isn’t new, but last year was another clear demonstration of its strength. When markets are illiquid, investors are richly rewarded for providing liquidity when everyone else is looking to sell.
Source: Bloomberg. (12/31/2019 - 12/24/2020)
In many ways, the initial reaction of markets to the pandemic was understandable. The entire world was facing a global pandemic of the likes that we haven’t seen in many, many years.
Investors knew the social distancing measures deployed by governments across the world were clearly going to have a devastating impact on the economy. But no one knew how severe the impact could ultimately be, and it is exactly that fear and uncertainty that markets so loathe.
Amid the chaos, policymakers moved with admirable speed to attempt to reinsert certainty into the equation. While they too did not know how the next year would unfold, they did know that by providing fiscal and monetary support, they could help calm sentiment and alleviate a degree of fear.
The speed and consistency of the Federal Reserve’s stabilization efforts were particularly potent. Over the course of several weeks, they sharply lowered interest rates, reactivated their Global Financial Crisis playbook, and boosted the scale and scope of their liquidity actions to an overwhelming degree. It was clear that Fed support was going to be substantial and lasting, and as the market rally commenced, we were quickly reminded of the adage, ‘Don’t Fight the Fed.’
As pronounced as the downturn was, at least it was uniform. The economy was sharply contracting, and markets were reflecting the pain. But on the way back up, the recovery has been anything but aligned.
While the stock market has had a historic recovery, its stunning performance stands in stark contrast to a stalling economic recovery. Economic output is materially lower, the trajectory of growth is slipping, and millions of Americans are still unemployed.
The key takeaway is that while markets reflect economic fundamentals over the long run, over the short-term, they are not one and the same. Outside factors such as policy intervention by governments, changes in investor sentiment, and other factors can drive substantial deviations in the two.
For investors, this necessitates having an investment process that is sophisticated and flexible, capable of adapting to changing market environments. No downturn is exactly alike, and they all have different causes and catalysts, but the market reaction often follows a similar pattern.
Dynamic markets require dynamic investment approaches. At Manning & Napier, all our investment strategies are actively managed, allowing us to continuously capture the most attractive investment opportunities in changing market environments.
For more on how these investing lessons impact our portfolios, register for one of our upcoming webinars.
This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.
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