With 2020 in the Rear View

January 7, 2021

There is no doubt that 2020 will be remembered and studied by historians, economists, anthropologists, and other scientists for many years to come. Some years become the markers for the big shifts in human history and it is highly possible that the last year will be one of those. I suspect many stories told in the future will start with “The Corona pandemic of 2020 caused…”.

Our lives have, temporarily, drastically changed. They are also changing permanently in many ways as we figure out how to respond to the crisis using the systems and technologies that were already available, rethinking our priorities, and challenging the customary things in our way of living.

I am not going to retell the story of 2020. You can find it by going back to our Crisis Updates from the first half of the year and our Newsletters of the second half. If you had enough of reading serious data heavy reports, here it is, in a nutshell: The year started great, the news of a novel virus came out, the virus spread fast globally, different regions and countries responded differently, economy and borders got shutdown by orders to save lives, markets tumbled, since we got ordered to stay away from each other. Through it all, we found every possible way to stay in touch by using modern technology to communicate, shop for supplies and everything else, learn, and entertain the whole family in order to keep them sane. Previously scheduled major events like Olympic Games got rescheduled or canceled, disruptors jumped in big, using the opportunity to grab the market share, toilet paper became the hottest commodity while oil got flushed, the Fed and their counterparts answered the call and moved with resolve. Our medical workers and first responders responded with heroic effort, scientist became important and cool again, finding solutions by tying the research from many fields together in order to get a protective vaccine for all of us. We have learned to live with masks on, massive public protests erupted continuing the divide the American social fabric, market started recovering with signals of economic activity showing life and growing, politics proved that they are the least efficient sector, more than 1.8 million lives were lost to the new biologic enemy of humans (data from John Hopkins University), US elections went on, for what it feels like as forever, stress-testing our democracy and our Constitution. Brexit got the final signatures. Asia possibly did better in combating the virus than Europe and North America with their economy recovering. The new 2021 could not come any faster.

Considering all the danger and issues we fought during the last year, end-of-the-year values of assets did very well to create some kind of a stretched V-shaped recovery. The growth investors did much better than it was expected at any moment since February, and income and conservative investors had no growth at the end, but did collect all of their scheduled income. The performance depended on the mix of investment assets held and the risks and possibilities of those assets in a socially distancing world. Consumer-focused tech stocks did best and oil and mortgages did the worst.

Here at CWM, we were busy the whole year, increasing the levels of cash positions in February and reducing them back in March and April, rebalancing more often than normally through spring, summer and fall, improving the quality and security of our dividends. Our second focus was on capital loss harvesting, trying to make sure that tax losses in our non-qualified accounts are used where possible, in order to have offsets available for future gains. We talked with many of you about improving your cashflow using the lower interest rate environment. With many of you focusing on priorities through the past year, estate plan strategies got revisited and fine-tuned. Retirement plans got stress tested again reminding us of 2008. Few of them had to be slightly adjusted, however, the rest proved that the hours spent analyzing and preparing over the previous years were worth it.

We all hope that 2021 is going to be a great year. We need it to be much better than the last one. After all, its number 21, often considered lucky as a number of spots on a standard die, magic number in blackjack, age of adulthood that gets young adults into bars legally. Number of things do look good. Vaccines should become available, the world is coming a little more together with its response and connectivity, economic recovery should be driven by its bounce back from the pandemic.

As a matter of fact, it is possible that the pent-up demand for services and goods might be larger than the supplies available. This could trigger the growth of inflation sooner than our loose monetary policy. Keep in mind that we expect the monetary policy to stay accommodative further into 2021. Expansionary policy was necessary to increase liquidity in the economy and it is still needed to support economic recovery and job creation. Our expectation is that we will also see some expansion of fiscal policy in the first half of the year to provide a lasting chance for growth.

We remain bullish as investors. Not because we are supposed to motivate other investors as believers in a long-term market economy growth, but because the fundamentals are telling us that we should be. Profits and interest rates drive stock values. In review of data from the third quarter of 2020 we see that corporate profits grew 3.3% from a year before. The 10-year treasury yield was standing at 0.84%, just topping 1% now. Let’s be conservative in our speculation and say the 10-year rate starts recovering with the economy and gets to over 1.50% by the end of the year. With low earnings rates on conservative investments, that still makes stocks look as the best asset to invest in.

While possible risks are out there, we remain diversified in order to lower the overall risk exposure. Let’s hope that scientists will have a chance to convince our society to pay more attention to other large but neglected risks after this pandemic crisis is over. I called the 2020 crash a black swan event earlier this year. After considerable reading into the matter of public health, I realized that a novel virus pandemic cannot be categorized as a “once-in-history”, unpredictable event. It is actually as possible as massive terrorist attacks, a major nuclear disaster or a nuclear war, a surprise revolution, or a surprise increase in the speed of Global warming. Hopefully, the pressure on policy makers to work on and create relevant policies, applying the same in order to reduce the identifiable risks will come from businesses and investors.

More than anything this year, we missed seeing you in person and spending time with you. Video calls are really good, but still not even close to the quality of communication gained from our in-person meetings. I remain an optimist, and I continue to believe we all will be vaccinated by the end of the summer, making our annual seminar possible. Until then, take care of your loved ones, stay safe, and stay optimistic about our future.

I wrote the above words prior to the events of January 6th 2021.

In my view, this was the saddest day in the history of our Republic and our Democracy, the birth place of all democratic systems around the Globe. Like many of you and your forefathers, I did what I could to move to this country, work hard and start a family here, because this place is a beacon of freedom and respect for laws that provides a chance for all who want to live their dream. Respect for our Constitution and our democratic traditions will prevail, with honor and decency that are ingrained into American society, bringing us together to defend our way of life. Continuing our work diligently in whatever we do, helping and respecting each other as we rise from this health, economic, and political crisis is the way that each of us can help with this effort. We should celebrate our representatives in the Capitol, and all who defended them on that tragic day, allowing them to continue the work we elected them for, making us proud, seeing that our system holds. Looking at the trading day today on January 7th, I see that many investors share my excitement and optimism for our future.

I choose to believe that the last year started great and turned out horrible, while this one started horrible and will become all that we need it to be.


Emir Culov

Partner, Portfolio Management Director

Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.