2020 Year End Review

During 2020, we experienced market swings like we hadn’t seen in many years.  March and April saw daily swings of 2,000 + points in the Dow Jones Industrial Average.  We proactively booked tax losses for our clients, while reinvesting the proceeeds during the market lows.  We stayed on course with our investment strategies in spite of the pandemic headline news.  Our clients were rewarded with capital losses for tax purposes, while maintaining equity exposure during the ride up in the later part of the year.  If you took out the rollercoaster ride and just looked at an 18% return (for the S&P 500), it was a really good year!    

At JVL Wealth Strategies our mission is to create a financial strategy that helps our clients withstand the ups and downs of the markets.  Our role is to prepare our clients for all economic and market conditions.  Our planning and strategies can withstand market uncertainties.  While we cannot control the news or the events and actions that affect the markets around the world, we can control the strategies and the planning to prepare our clients for the uncertainties the world has to offer.

We deeply value the trust our clients place in us.  If you know of someone who could benefit from our experience please let us know.

2020 was a great year for the JVL team, we rebranded under the JVL Wealth Strategies name, created a new look and logo and are very proud of our new website – if you haven’t had a chance to visit, please do so at  www.jvlwealth.com Feel free to pass the link along.
By: Jerry VanderLugt CPA, CFP®, CVA

JVL Wealth Strategies announces new partners

 

As we continue looking forward and serving our clients for the next 25 years, JVL Wealth Strategies recently announced the election of Matt Kunnen and Chad Soukup as partners.  “Matt and Chad are much more than financial advisors; they have meaningful relationships with our clients and coordinate with each families’ team of advisors to proactively ensure long-term financial security,” said Jerry VanderLugt, founder and principal of JVL Wealth Strategies.

US MARKETS

What a year it was in the markets!  Thinking back nine months to the COVID driven March – April market lows, who would have predicted the markets would end the year so strong.  While it was a wild ride, 2020 was a very successful year for investors who held on. The following is a look at the past two years in the U.S. markets:      

 

INTERNATION MARKETS

International stock markets trailed the U.S. markets.

 

S&P 500

The S&P 500 price only index (excluding dividends) was divided into three distinct periods.  The market began to fall off with the discovery of the COVID virus on U.S. soil, bottoming in late March, before rebounding back to break even by the end of July.  The market was up 10% by early September before falling back to break even by the end of October.  The last two months of the year saw the market rise to end the year up double digits.

Looking back over the last 21 years, the S&P 500 price only Index (excluding dividends) has experienced three bear markets, yet has gained 155% from where it began on January 1, 2000.

The S&P 500 total return (including dividends) was another positive year.   Looking over a longer time period we see that the S&P 500 has been positive in 70 of the past 95 years meaning that 74% of those years (1926 – 2020) have shown positive returns.

 

GDP

The year was unprecedented as the government mandated the closing of a wide range of businesses for portions of the year.  Different regions had different shutdown rules, but the impact on many major industries was felt for a long period of time.  As such, the quarterly changes in GDP (Gross Domestic Product) took wild swings during the year.  Given the late timing of the shutdowns in March, the 1st Q decrease in GDP was 5%, followed by a 31% drop in the 2nd Q.  As many businesses were able to open up the 3rd Q saw an increase of 31%.  4th Q increased slightly at an annual rate of 4%.  Overall, it is expected that the U.S. economy shrank by 3.5% during 2020. Current projections are for an increase of 3.75% in 2021.

MANUFACTURING

We continue to keep an eye on the PMI reading (Purchasing Managers Index) which bottomed out at 42 in April, due to the shutdowns, before charging back to record seven consecutive months of readings above 50. When the index is above 50 it signals an expansion in the manufacturing sector, while a reading below 50 indicates a contraction.   

The capacity utilization rate dropped to 64% in April, before rebounding to 75% by the end of the year. This signals that factories, while busy, have the capacity to increase production should demand rise.

Inventory levels confirm the effects of the shutdowns.  Inventories levels spiked in April, as demand plummeted, but ended the year at levels comparable to where they started the year.

Employment

Employment was the real story of 2020.  After reaching a record number of people employed (152 million) and historical lows in the unemployment rate (3.5%) at the beginning of the year, the COVID shut downs brought employment to a halt.  The economy lost 22 million jobs in March and April and has only added back 13 million of those jobs.  That means that 9 million Americans that were working in January are no longer employed.  Many of those jobs are in the leisure, hospitality, travel and retail industries.

The unemployment rate reached 14.8% in April before ending the year at 6.7%.   The U6 rate, which is the broadest measure of those unemployed, rose to 22.8% in April, before settling at 11.7% at year end.

One way to analyze the employment situation is to look at the raw data.  There are 260 million people in the U.S. of working age.  Of those, 161 million are “wanting to work”.  Of those 161 million persons wanting to work, 148 million are currently employed, leaving 13 million unemployed.   Another way to look at the data is that there are 99 million people over the age of 16 who do not “want to work” (age, in school, stay at home parent, etc.) plus another 13 million people who want to work but are not employed.

We can also look at the data to view the percentage of individuals wanting to work with the percentage actually employed.  Currently, 61.7% of the U.S. population wants to work and 56.8% are working.  This is the lowest level in 50 years.     

Housing

Monthly new home starts took a dive in March and April, but ended the year averaging around 1.4 million per yer.

Sales of existing homes followed the same pattern, dropping significantly during the shutdown, but rebounded to end the year on a 6.7 million per year pace due to the pent-up demand.

The interest rate on a 30-year fixed rate mortgage continued to fall during the year.  Rates started the year at 3.65% and have fallen to 2.77% as of the end of the year.  Falling rates have been good for home sales.

Providing support to the housing sector is that home prices continue to increase.  In 2020, the average home price increased 7% over last year, the largest annual increase since 2013.  Home prices are 70% above their 2012 lows.  The following chart tracks the year over year percentage change in home prices.

Consumer Sentiment

As one might expect during a national pandemic, consumer sentiment, as measured by the University of Michigan monthly survey, fell drastically during the year, falling from a reading of 101 in January to 79 in December.

Consumer Sales

Retail sales were hit as well, falling 35% through April, before rebounding to end the year down 2% from last year.

The automotive industry took a temporary hit as well.  New vehicle sales dropped to an annualized pace of 9 million vehicles in April, before rebounding to an annual pace of 16 million by year end.  For the year, there were just under 15 million vehicles sold in the U.S.

 

 

Interest Rates

The Federal Reserve lowered the Fed Funds rate in response to the COVID pandemic, lowering it to almost zero.  Longer term rates (10 year Treasury rates) are determined by market forces and dropped below 1% by the end of the year.

Inflation

Both headline inflation (which includes food and energy) and core inflation (which excludes food and energy) hovered around 1% – 2% during most of the year.  The Federal Reserve has a target of 2% for inflation.

OIL

The price of a barrel of oil started the year at $66, dropped to $19 in April, and ended the year at $52.  The affordability of oil is one of the tailwinds to a growing economy.

US Dollar

The U.S. dollar fell against the other currencies during the year, which makes imports more expensive but makes our exports more attractive to overseas consumers.

Stocks

Corporate profits are a large driver of the stock market.  The S&P 500 earnings are projected to drop 23% vs. 2019, however 2021 is projected to increase 37% over 2020.  Since the market is always looking ahead, the stock market has rebounded based on the future expectations.

Given the S&P 500 was up 18% in 2020, while corporate profits decreased 23%, we see that valuations, as measured by the Price to Earnings (PE) ratio made up the difference, increasing from 21 to 31.  That puts current valuations above both the long-term 10 and 20 year averages.

BONDS

The bond market is a totally different market.  Interest rates have remained low and provide a tailwind to owning stocks.   

References

[1] Information obtained from Morningstar Direct: Various U.S. Indexes Total Return

[2] Information obtained from Morningstar Direct: Various U.S. Sectors Total Return

[3] Information obtained from Morningstar Direct: Various Foreign Indexes Total Return

[4] Information obtained from Morningstar Direct: S&P 500 Price Return

[5] Information obtained from Morningstar Direct: S&P 500 Price Return

[6] Information obtained from Morningstar Direct: S&P 500 Total Return

[7] Information obtained from Morningstar Direct: “FRED, Real Gross Domestic Product, Seasonally Adjusted Annual Rate , U.S. Bureau of Economic Analysis, Billions of Chained 2009 Dollars”

[8] Information obtained from the Institute of Supply Management: https://www.quandl.com

[9] Information obtained from Morningstar Direct: “FRED, Capacity Utilization: Total Industry, Seasonally Adjusted , Board of Governors of the Federal Reserve System (US), Percent of Capacity”

[10] Information obtained from United States Census Bureau website: https://www.census.gov

[11] Information obtained from Morningstar Direct: “FRED, All Employees: Total Nonfarm Payrolls, Seasonally Adjusted , U.S. Bureau of Labor Statistics, Thousands of Persons”

[12] Information obtained from https:www.portalseven.com & Morningstar Direct: “FRED, Civilian Unemployment Rate, Seasonally Adjusted, U.S. Bureau of Labor Statistics, Percent” & “FRED, All Employees: Total Nonfarm Payrolls, Seasonally Adjusted , U.S. Bureau of Labor Statistics, Thousands of Persons”

[13] Information obtained from the U.S. Bureau of Labor Statistics website: https://www.bls.gov

[14] Information obtained from Morningstar Direct: “FRED, Housing Starts: Total: New Privately Owned Housing Units Started, Seasonally Adjusted Annual Rate , U.S. Bureau of the Census, Thousands of Units” & “FRED, Privately Owned Housing Starts: 1-Unit Structures, Seasonally Adjusted Annual Rate , U.S. Bureau of the Census, Thousands of Units”

[15] Information obtained from Morningstar Direct: “FRED, Existing Home Sales, Seasonally Adjusted Annual Rate , National Association of Realtors, Number of Units”

[16]  Information obtained from Federal Reserve Bank of St. Louis: 30-Year Fixed Rate Mortgage Average in the United States, Percent, Weekly, Not Seasonally Adjusted

[17] Information obtained from S&P Dow Jones Indices website: http://us.spindices.com/index-family/real-estate/sp- corelogic-case-shiller

[18] Information obtained from University of Michigan Survey of Consumers web site: http://www.sca.isr.umich.edu

[19] Information obtained from United States Census Bureau website: https://www.census.gov

[20] Information obtained from Morningstar Direct: “FRED, Total Vehicle Sales, Seasonally Adjusted Annual Rate , U.S. Bureau of Economic Analysis, Millions of Units”

[21] Information obtained from Federal Reserve Bank of New York website: https://apps.newyorkfed.org/ & Morningstar Direct: “FRED, 10-Year Treasury Constant Maturity Rate, Not Seasonally Adjusted, Board of Governors of the Federal Reserve System (US), Percent

[22] Information obtained from Morningstar Direct: “FRED, Consumer Price Index for All Urban Consumers: All Items Less Food and Energy, Seasonally Adjusted , U.S. Bureau of Labor Statistics, Index 1982-1984=100” & “FRED, Consumer Price Index for All Urban Consumers: All Items, Seasonally Adjusted , U.S. Bureau of Labor Statistics, Index 1982-1984=100”

[23] Information obtained from Morningstar Direct: Brent Crude Price

[24] Information obtained from Federal Reserves Bank of St. Louis website: https://fred.stlouisfed.org/

[25] Information obtained from S&P Dow Jones Indices website: http://us.spindices.com/indices/equity/sp-500

[26] Information obtained from S&P Dow Jones Indices website: http://us.spindices.com/indices/equity/sp-500

[27] Information obtained from Investing.com website: https://www.investing.com/rates-bonds/