Lessons from the Plague Year | Part I – Planning & Investing

Around this time a year ago, you would have been considered a pessimist if you had said we would still be in quarantine in March 2021. Had you predicted we would lose 20 million jobs in one month and the economy would decline at an annualized rate of 33%, many would have considered it a doomsday scenario. If you predicted both, and that the stock market would make new highs, you would have been dismissed as being out of touch with reality. And yet once again, the truth was stranger than fiction.

After such a strange and trying year, we thought it would be useful to look back on some lessons learned in the markets, the office, and at home.


Before the rise of the internet, crashes were often slow-motion train wrecks. Not always, as anyone who lived through 1987’s Black Tuesday drop of 22% will tell you, but that was the exception that proved the rule. The crash of 2008 was notable for the way it accelerated from mid-September into October before hitting a bottom in early March, but that had nothing on 2020.  As late as February 24th, U.S. markets were still in positive territory. Exactly one month later, on March 23rd, the S&P was down 32%.

There are many lessons to draw from that experience, but foremost may be the importance of having a cash reserve. Generally, if you have expenses coming up in the next six to twelve months, it’s good to have cash on hand now to cover those expenses, whether they’re monthly living expenses or larger one-time purchases.  This allows us to view panic with a measure of detachment. If your obligations are already covered for the year, you can rest with the assurance that you don’t need to sell at the wrong time.

There’s no magic to the six- to twelve-month time frame, however, most of us can reasonably anticipate our needs for those upcoming months. And, according to Hartford, the average bear market lasted 9.6 months, between 1929 and 2020.


Forced indoors, many of our expenses came down more than we would have imagined. In cases where AFM had transaction data for clients before and during the pandemic, it was common to see spending down by as much as 66% from the level of 2019.  Of course, some expenses were replaced with others but the restrictions during lockdown shed light on just how much of our spending is truly discretionary each year.


The most logical, and most difficult thing to do, in investing proved itself once again in 2020. In most aspects of our lives as consumers, we’re thrilled by a price reduction or a discount. But market drops tend to feel less like opportunity and more like a catastrophe, and it’s not in our nature to dive headlong into a catastrophe.  Nevertheless, the moment of maximum panic in late March, before a rescue package had been announced, represented a tremendous investing opportunity.

The investor who put $100,000 in the S&P 500 on March 23rd, would have had $169,850 at year-end, a gain of nearly 70%.  Although, that is easier said than done, and guessing the bottom of the market is a fool’s errand. However, you don’t have to get it perfect to get it right. An investment a couple of weeks before or after March 23rd would have been rewarded handsomely.


It was disorienting to see markets recovering quickly as March turned to April, and then moving to new highs later in the year in the midst of worsening virus numbers and tighter lockdowns.  Investments in stocks are an investment in the future growth of the company (and its stock price), not a referendum on the current situation. It’s an old saw the market recovers before the economy, and as often happened in the past, stocks looked ahead to recovery. The government injection of stimulus into the economy, coupled with lowered interest rates, further pushed investors back into the market. While things got worse in the economy, markets paradoxically got better.


Or politics, or any single narrative, for that matter. As discussed previously, the S&P 500 Index is not an equally sliced pie of the 500 largest U.S. companies. In fact, the top five companies make up 20% of the index. Companies like Facebook, Apple, Amazon, Google, and Microsoft, whose businesses thrive when we’re on the couch, rewarded investors in 2020. Share prices soared for tech companies, pulling up the overall index returns. Meanwhile, “real world” companies like Marriott, United, or Wells Fargo languished, albeit their impact on the overall market is negligible.

A look at the spread of returns between large-cap growth and large cap value companies illustrates the stark difference in returns in 2020.  According to J.P. Morgan, large cap growth companies (such as Google or Amazon) returned 38.5% in 2002, while large-cap value companies (think Exxon or Bank of America) returned just 2.8%.

Large cap value stocks are some of our biggest, most established companies, but the impact their stocks have on the market was marginalized in 2020. Take, for example, the case of Facebook and Marriott. Facebook shares were up 33.1% in 2020, while Marriott was down 12.9%.

Facebook has 59,900 employees worldwide. Meanwhile, Marriott employs roughly twice as many, at 121,000 worldwide employees. And yet, Facebook makes up roughly 2.02% of the S&P 500, while Marriott represents just 0.117%. Thus, Facebook has 17 times the impact that Marriott does on the direction of the market.


This isn’t to say that there is no relationship between the economy and the markets. The pandemic accelerated the encroachment of technology into all parts of our lives. Many of us were stuck at home for months at a time, replacing dinners, concerts, and trips with Facetime and Netflix. Movies shifted to home releases; musicians began selling tickets to virtual concerts; trips to the market or the coffee shop were replaced with Amazon, Instacart, and Uber Eats; and work meetings and birthdays migrated to Zoom.

City dwellers, cut loose from being tethered to a downtown office migrated outward, sending suburban home prices soaring.

At the beginning of the pandemic, so much of this felt like a lifeline. It was easy to wonder what would have happened had the pandemic come in 1991, when online ordering, grocery delivery, video chat, and smartphones were a dream of the future.

Still, as we grinded our way into the fall and winter, the novelty wore off in many cases. Zoom fatigue set in. We don’t know yet which innovations and habits developed over the past year will stick and which will be discarded. Will the shift to the suburbs continue if companies return to the office in a hybrid fashion? Will work from home become the norm? It is clear that our economy is moving further online, and that companies with the ability to adapt their workplaces, product, platforms, and delivery systems between the real and online worlds, will be best positioned to survive.


Of all the terrible moments we endured over the past year, quite possibly none were more horrific than the stories of people saying goodbye to loved ones over Facetime from a hospital iPad. The virus did not afford its victims the time to get their affairs in order. Even if they were able, could they have coordinated heirs, attorneys, and paperwork in a locked-down world? As President Kennedy stated in his 1962 State of the Union, “the time to repair the roof is when the sun is shining.”

Continue to Part Two >>


Presented by Chris Rivers