Lessons from 2020

Dec 26, 2020 | Economy, Financial Planning, Investing, Retirement

On this week’s podcast, Karl looks back at 2020 and reveals some key things we learned as investors. Plus, what all was in that COVID-19 relief package?

Hey, good morning, everybody. Welcome to the show. Thanks for joining me. This is Karl Eggerss and this is Creating Richer Lives, the podcast. And let me be the first to wish you a happy new year, I hope your Christmas was great. This is our last show of the year and what a year it’s been, right? I won’t give you all the cliches of 2020, but we did want to take this time to just reflect back on some things we learned, what kind of year it was from a market perspective. You’ll get plenty of other news and information about what kind of year it was from everybody else. But let’s focus on the financial part of it here on the podcast. Just a reminder, this show is brought to you by Covenant LifeStyle, Legacy Philanthropy, and if you need Covenant’s help with any of your financial issues, you want to discuss some questions, some tactics, 210-526-0057.

Our website creatingricherlives.com. And just a reminder, if you would like to get Covenant U, which is our weekly educational distribution, it comes every Monday afternoon, all you have to do is either go to the website or you can just text the words, Covenant U, with the letter U to the number 22828, that’s it. That’s all you have to do. And it’ll pop you right into the email list and you will get that every Monday afternoon. There’s usually about four or five items in there. Everything from our CIO’s blog to the podcast, of course, any radio interviews, television interviews, blog articles that were written throughout the week. It’s all going to be in there in one concise format. Before we look back at 2020 and review that, let’s talk about this week. It was a holiday shortened week with Christmas. Of course, the markets were closed on Friday for Christmas, but they are also closed a little early on Christmas Eve at noon central.

So we had a very short week, but it was still jam packed with information, right? We heard about this new strain with not only had we’ve heard about the new strain in the UK of COVID, but we also heard about a new strain in Japan. And so, but the markets seem to ignore that for the most part, there was a knee jerk reaction down, initially, when that news came out, markets opened down I think 500, 550 points somewhere around there, or at one point during the pre-market and really finished pretty much flat on that day. And it was interesting to watch as that news cross, but a lot of the drug makers were saying any of these new strains, this vaccine should be able to take care of it. And the market seemed to buy that. We’ll see about that, but that was really a big news event this week.

And then of course the COVID relief bill, which had a lot of good stuff in it, but boy had a lot of bad stuff in it. The good stuff of course was from a business standpoint was, we had the $600 checks. We also had a big part of this that wasn’t talked about a ton, at least in the media, was the deductibility of the PPP funded expenses. Remember that was something that was not going to happen. So if you had PPP expenses, they were not going to be deductible. And that was clarified in this. And also for people who did get the PPP originally, they could reapply. And so there’s a lot of good stuff regarding the PPP, which was huge, if you remember, I mean, that was a big, big deal back in the spring time to really bridge the gap for some of these businesses. There was some tax credits in there, a lot of other things in this bill, however, there was also the pork.

And that continues to be an issue that really has a lot of people hot. And we heard about this thing going back and forth and really President Trump of course wanted bigger checks, $2,000 checks, but this bill is 5,593 pages long. We know many of the congress people that signed it, never read it. They said they didn’t have time to read it. And some of the things that were in there, of course, you may or may not have heard about, but there was money given to Pakistan, $15 million, Cambodia got 86 million, Nepal 130 million, Burma 135 million, Ukraine $453 million and Sudan $700 million. And then the Smithsonian got a billion dollars. So when you talk about $900 billion and you think about what that really could have done in terms of helping the American economy, because of COVID, remember, that’s what this bill is supposed to be, it was COVID relief.

And it ended up being this four and a half months negotiating. And as many of these bills do and have done over the last several years now, there’s an issue. They go to put this thing together and then it gets volleyballed and all the congress people put their various programs in there and it’s becomes this big negotiating ploy and putting your own agenda in there. Instead of the point of this was COVID relief for the American workers. And when you think about restaurants and a lot of people in the service industry, a lot of this bill did not address those things. And so that’s what has people very, very upset. When you think about the $600 that’s going to Americans that are fit the criteria, it could have been a lot more had some of this other money not been given away.

So that had a lot of people fired up. That was definitely something people were talking about this week, but at the end of the day, again, there’s nothing you and I can do about it. And so some of the good things that were in there, again, primarily to me was some of the PPP and other round and the deductability, which is going to help out a lot of businesses. But that was some of the big talk this week. Now, in terms of what was moving the markets, you really, for the most part, when you look at the S&P, flat, when you look at the Dow Jones, flat, kind of interesting, because again, as we came into this week, I mean, if you would have heard about all of the stuff going on holiday shortened week, now we know about the Santa Claus rally.

So maybe that offset it, but some of that news flow was pretty negative and yet we still saw the markets hang in there. We are in a bull market, we’re in a stretched market. And I’ve been mentioning that it is stretched. There’s no question about it, and if you look at the Dow Jones, you remember it went above 30,000, oh, back in November, sometime for the first time. And we’re sitting at 30,200, we’ll call it. So we haven’t moved a bunch from that level. And when you look at some of the FANG stocks and you look at some of these hot areas, they flattened out as well. So when that happens, you could be getting the correction starting, but you could be getting correction in time where essentially we come back two months from now and we’re still flat, but earnings may be higher.

Things may be a little better. And so you just get a sideways market that works off what’s considered to be the overbought condition. And we’re stretched. I can go through numerous indicators that show that the market is stretched, whether it’s the Dow, the S&P the Russell 2000. Now, does that mean that number one it’s going to fall dramatically? No, I just talked about it can correct through time, but number two, it depends on your situation because if you’re sitting there with a tremendous amount of cash still because you worried about the markets in February and March, maybe rightly so, but now you’ve missed this really huge historic bounce back. If you’re still in a lot of cash, your conversation is different than somebody that has 95% of their money invested and they’re waiting to get the last 5% in and they’re waiting for some type of pullback.

That’s different. And so markets are stretched, but let me be clear that medium term, the markets are still in a bull market, that things are still improving. They are improving. Now, as we’ve said, the economy and the reason why this fiscal stimulus package was so important is because the economy rebound that we’re experienced is slowing down. Now it’s still improving, but it’s slowing down, so we need a little shot in the arm, right? So as we move along here, we just need to monitor how the economy is doing, but we’re continuing to get improvement. And again, at the end of the day, I’m not an economist, fortunately, because most of them are wrong most of the time. But what we do is monitor the markets because predicting the economy’s impossible, accurately and predicting the stock market for that matter is impossible as well.

What we can do is monitor what’s going on in the underpinnings. What’s going on with confidence. We look at oscillators, which are things that show us if the market’s over stretched to the downside, over stretched to the upside. And what we can see right now is there still money coming into the market, we know that November, there was a huge burst of money coming into the market, especially after the first vaccine was announced. And of course we had three in a row that were announced and we have people taking them. And we’re here at Christmas and we have people taking a vaccine that didn’t exist earlier this year, which is fascinating. What we can see is when November struck and we got those vaccine announcements, we did see a big move into the markets. And we saw a rotation into small caps, into international, into financials, into energy.

The market broadened out in November. Now in December, we have seen, again, this flattening out a little bit, but it hasn’t gone down. And so when stretched markets don’t go down, but just move sideways, that’s really, really bullish. So we’re still bullish. But again, I think making some tweaks, if you look at inflation picking up a bit, if you look at interest rates approaching 1% on the 10 year, never thought I’d say that, but that’s happening. If you look at some of the things that are changing since November, it’s a broadening market. Now, again, what’s interesting is it doesn’t mean the stuff that was overvalued is coming down. It’s just, we’re seeing a slight rotation, but we’re seeing much more breadth to this market. And that’s very, very important and very good. So when we look back at this week, again, some of the markets were flat, but some of the outliers, or some of that retail pharmaceuticals up a couple percent, the Russell 2000, a couple percent.

Banks and, as I mentioned, financials up about a percent and a half, so those were some of the standards. On the downside, we did see Bitcoin kind of taking a pause, which I have a feeling we’ll talk about a little more in the next few weeks in terms of that and cryptocurrencies in general. Energy down about 3% after I think a justified break after that huge move in November. Gold miners down, steel down, consumer staples down, all those down, anywhere from a percent and a half to 3% or so. So that was kind of the week, but really I wanted to spend a few minutes really talking about 2020. I think the best thing we can do and in every year, but this year in particular is look in the mirror and say, “What did I do well as an investor, as somebody who is trying to manage my money, what did I do well? What did I do poorly?”

And this is a year that certainly exaggerates some of that, if we were going to make a bad decision, it was probably horrible. If we’re going to make a good decision, it probably paid off big time, that’s 2020. So as we came into February and March, the markets were humming along pretty good. And of course, we started to hear about this virus, which we’ve heard about corona viruses in the past, and they’ve kind of just petered out, we haven’t heard much about them here in the States. And then this one didn’t do that. And the media jumped on it, it started to spread and the market started to take shape. Unfortunately, that shape was what looked like a lowercase N, started to head straight down. And it started to accelerate dramatically. I mean, the market’s really, for the most part, were going straight down and that was in March. And we started to see some unusual things like energy. Energy, I mean, when you look at WTI crude oil, it went to minus $35. So things started to spiral downwards.

The economy shut down, literally, we all went into quarantine for a few weeks where nothing was happening. Nobody was flying. I mean, literally nobody was flying and it was something we hadn’t seen before. Now we’d seen 9/11. We’d seen recessions, we’ve seen the Gulf War, we’ve seen things and we’ve seen markets drop, but as fast as this happened, it was more of a multi-day crash kind of like 1987, which was one day. But this was a multi-day crash that happened over a few weeks. And during that time, it was clear that boy, some of these businesses in the service industry primarily were going to suffer and maybe not come back.

And what’s fascinating is how fast some of the stocks and some of the companies and did rebound that looked like they were never going to come back, but there was clearly a transition and a speeding up of the whole online video conferencing, all those things that frankly people could have been doing three years ago and just kind of had an epiphany that, “Oh, I can actually buy stuff online. I can see my patients online.” Shouldn’t this been done years ago? But it caused a lot of people to have a light bulb that maybe I can work from home.

Maybe I can run my business without having to see all my employees every day. Those were things that you would think would be pretty obvious, but it took something like this to really force people to address those issues and to do that. And so what happened was all of the stocks that do that really benefited, video conferencing, hardware, software, shipping, online retailers, I mean just took off. It was the, what was called the stay at home trade and it worked, and it worked very well. And the, we’ll call it reopen economy did very poorly, cruise ships, airlines, brick and mortar retailers without an online presence. Those were all things that suffered dramatically and it continued. But the interesting thing was, if we look back a couple of things that I think about personally is how fragile our system is, we think it’s very bulletproof and that it would take a lot to bring our economy down, our stock market down.

I realized things were much more fragile than maybe I thought, not really the stock market, we know that. In fact, I think the stock market was due for something like that for a while. In fact, we were talking about an internally myself and one of my colleagues really a few years ago saying, we’re not really worried as much about a long lasting bear market, like a 2008. We were more worried about a crash like scenario because of the proliferation of ETFs, triple leveraged ETFs, the amount of people that are able to trade, the algorithms and computers that are doing the trading now. That’s what was worrying to us. And you kind of saw that play out in March, but this happened so quickly. But the fragileness of not the stock market, of just our economy in life really was the thing that kind of caught my attention.

But what did you do February, March, April, May, June back then? We all made mistakes, we either didn’t buy enough. We should have levered the home, taken a second mortgage, tongue in cheek, of course, but had we known the rebound would be that dramatic adding to stock exposure. And you look back and it was a time in hindsight and some of these things that I’m going to talk about, we did. And some things we could have done more of, some things we didn’t do enough of, and I’m talking about me, you, everybody probably, but you should have been at least tax loss harvesting where you sell stock A or fund A and you buy a similar fund or stock that you know is going to move similarly to what you just sold. And you do that tax loss swap at that time.

Now, usually that’s done at the end of the year, but this was an opportunity to do that and what that does is that books capital losses, gets them on the books so that going forward, you don’t have to worry about capital gains. And so now some mutual funds this year paid big, large capital gain distributions, which you can’t really control. And so it kind of offset some of those losses that you took advantage of in March and April. But when you think about it, again, there were some good companies, some good funds that were temporarily down in March and April, that you could have sold some bad ones. So you not only do you get the tax loss harvest, and again, we’re talking about taxable accounts, but you still could have made some swaps in IRAs, not for tax purposes, but just to upgrade, we’ll call it your portfolio.

And so we were doing some of that. We were focusing on some areas that we thought would benefit from the pandemic in terms of technology, in terms of healthcare. But I think selling some things that were… And going into some of the areas that thought for sure these things would fall and continue to fall, and they rebounded so fast, it’s amazing to watch what happened. And so when we look back at 2020, I think one thing that stands out to me is things are never as bad as they seem, and they’re never as good as they seem. And so again, the fragility of our situation was exposed in March and April, but also things do recover, and there are adjustments. And so when that happened, the government, and for those that criticize the fed, and I’ve probably criticized them on this podcast, a time or two, they did a wonderful job.

They did what they had to do, and they did it quickly. And it changed the trajectory of this market and they should be applauded for that and the government in general, did some amazing things. I mean, the stimulus package with the PPP, now that’s in sharp contrast to what we’ve seen in recent days where it took four and a half months, and we get a pork filled relief bill. And look, we can’t worry about right now, unfortunately, we can’t worry about some of this debt that we know our country’s taking on because we had to do some of those. You wouldn’t have wanted to see what it looked like had we not done that. So extreme year, extreme conditions, but I do think each and every one of you listening, we really do have to reflect back and say, “What did I do wrong?”

And “What did I do right and I should pat myself on the back?” And nobody, again, nobody did it perfect. But I do know that getting ultra bearish and go into cash and sitting there was not the right decision. Whenever you see a market saw for whatever reason, for whatever reason, even a pandemic, even with the economy shutdown, there are things to buy and you as an individual have to stay the course, that’s what a financial plan is all about. And if you don’t, it can alter your retirement permanently. And we see a lot of people that were in that situation this year that really made some bad decisions back in March and April. And when your anxiety level’s high, you’re going to make bad decisions. So you have to step back and use this time, this is another thing you can reflect back on forever.

I can look back at the dot-com bubble and I can say, “Boy, I remember those companies that seemed like they were going to go up forever and they had good products, but because they’re overpriced, they ended up getting hammered.” I can use that data in my brain now to see what’s happening in 2020, which again, some of it is happening in 2020. I can also look back and say, “You know the last time the stock market sold off that fast, that much, I regretted not buying more.” So when 2020 rolls around you take advantage of it. It’s the same thing going forward. When something happens in 2023, you should use 2020 to reflect and take that data and say, “I need to put my emotions to the side and know what I did back then, what was wrong.” Because again, if you do it correctly, volatility can be your friend.

This was extreme and it was scary, folks. This was no picnic, but there were still things to do and again, when did you need your money from your account? If you needed it within a few months, it shouldn’t have been in the stock market in February and March. If it’s long-term money, then frankly it should have stayed in the stock market. Are there adjustments to be made? Are there times to take profits, times to build some cash? Sure those are all important. But we’re talking about the big picture, knowing of people that went to 50, 60, 70% cash, 100% cash, not before the pandemic, but during the pandemic at the lows and are struggling and it will alter their retirement going forward. So those were a few things I learned in 2020. I think as we go into 2021, it is going to be about this vaccine, are they effective?

Do people take them in mass quantities? Do we have enough in a timely manner? And does the economy continue to improve? Because a lot of these companies are priced as if the economy is definitely going to improve. And now we need to see some proof as we go into 2021, but things still do look good. It shows American ingenuity and it’s amazing to watch how fast these things were developed and people should be applauded. And again, there’s a lot of… This is another thing that I learned in 2020 was how you could take something like a virus, how political a virus can get, from COVID relief to whether people should take a shot, to whether somebody should wear a mask. Plenty of shows on that. But that was pretty interesting to watch. And some of it pretty sad to watch, frankly.

So hopefully we have some healing in 2021 as well, but it’ll be interesting because we’ve got some new tax laws, we’ve got some extensions, we have some things expiring. We have a lot of planning to do. And that perhaps, I don’t want to say it’s more important than investing, but it’ll probably be a bigger focus for you in 2021 is planning, given the tax changes, given potential state law, estate planning, a state law changes, things like that are going to be really important in 2021. So stay tuned for that. I did have more guests in 2020 than I’ve ever had on the podcast. We look to do more of that. I look to do more video as well. So make sure you stay tuned to our YouTube channel, Creating Richer Lives. We’re going to be doing a lot of interesting things on there, especially shorter form content, two, three minute tips and so forth.

So looking forward to that and just doing more and you guys tell me, did you enjoy the podcast in 2020? What would you like to hear? What would you like to see in video? And we had a lot of new listeners this year, grateful for you guys. Let’s keep it going. I am going into year, I don’t know, I don’t know I think 13 or 14 doing a podcast. So looking forward to that and new challenges and just new audience members. And we appreciate you very much. Thank you for sticking with us. We hope that we added some value in 2020, there’s some years that maybe we don’t add some value because markets are pretty smooth, not a lot of tax things going on. Not a lot of financial planning changes. This was not one of those years. So hopefully we added some value to your lives. You guys have a wonderful new year and we’ll see you back here in 2021, take care everybody.

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