Chalten Investment Review – Q4 2020

Welcome to the Chalten Investment Review for Q4 2020.  In our quarterly review one year ago we counselled investors to “filter out the noise” in 2020 – easier said than done when you experience a year like the one we just had!   The issue that dominated 2020, of course, was COVID-19.  As the pandemic spread during the early part of the year, uncertainty over the seriousness of the disease and potential economic consequences led investors to sell risky assets such as stocks and market indices dropped precipitously.  As the severity of the disease became better understood, case growth slowed in the later spring / summer and much of the economy reopened, investors reset their expectations and markets rebounded.  Q4 ended with a mixed bag of news with optimism over vaccine development/deployment alongside increased cases and commensurate lock-downs around the world.   Markets in Q4, however, continued to display confidence that we will move through the pandemic. 

The flow of news around the US election certainly added to the noise but as we discussed in last quarter’s review, the market usually looks through presidential cycles. 

Overall, global markets were up more than 10% during the last three months of the year, rewarding investors who hung on through the volatility.

While 2020 was a year that most are happy to put behind us, it delivered some useful lessons for investors:

  • Expectations matter – market prices are driven by investors’ expectations of what is going to happen in the future, both near and long-term. When uncertainty clouds those expectations, investors get nervous.   The market is an efficient mechanism for embedding investor expectations about the future.     
  • Diversification is critical – it is very difficult to pick winners and losers, especially in a year such as 2020 which saw winners become losers and losers become winners at different times throughout the year. Diversification means you will always hate something in your portfolio but in the long-run you will have a better overall investment experience by diversifying than by trying to pick winners and losers.
  • Stick with the plan – investors who stuck with their plan and rebalanced in March rather than sold to cash were rewarded. The market correction in 2008/2009 scared many investors into selling and 2020 brought a similar dynamic.  The following chart shows clearly that investors moved massive amounts of money into cash during the worst month of the 2020 downturn and retained that cash holding through the subsequent and fairly sharp recovery. 

Q4 Market Review

The last three months of the year brought continued COVID and political turmoil but also demonstrated the resiliency of capital markets.   Overall global equity performance was strong in Q4 as the market recovery continued. 

In the US, optimism over vaccine developments, an economic stimulus package and continued accommodation from the Federal Reserve likely buoyed investor confidence.     

In Europe, increasingly harsh restrictions were balanced against hope for the vaccine while Britain finally managed to negotiate a Brexit deal with the EU.   Asian developed market equities and emerging market equities performed strongly.

In most markets, smaller stocks and stocks with cheaper valuations (value stocks) outperformed larger growth stocks over the quarter.   

Within the bond markets, there was some divergence as US government bond yields increased slightly while European yields dropped.  Corporate bonds again outperformed government bonds over the quarter and emerging market bonds performed well relative to developed market bonds.  The Canadian dollar gained nearly 5% compared to the US dollar over the quarter leaving the Loonie up 2% for the year on a relative basis.

  • The total return on the Canadian stock market was 9.0% for Q4 2020.
  • In the US, the total net return of the S&P500 in Canadian dollar terms was 6.9% for Q4.
  • The total net return for the S&P Global ex-US BMI Index of stocks outside of the US (in Canadian dollar terms) was 12% for Q4.
  • The Canadian dollar gained 4.8% against the US dollar over the quarter.
  • Total return for Canadian bonds was 0.5% over the quarter, matching the performance of Global Developed bonds and trailing that of Emerging Market bond returns which continued to rebound during the quarter along with other riskier asset classes.   

Financial Planning topics of interest

Of course, a new year brings new TFSA and RRSP contribution room and an opportunity to make 2020 RRSP contributions through until March 1.  Remember the CRA often does not update your account with current TFSA contribution room until mid-February or later.  You may also wish to make new contributions to RESP and RDSP accounts to take advantage of various government grant programs.

2021 will likely bring continued government support programs to assist those impacted financially by COVID-19.  In BC, the recently launched BC Recovery Benefit provides a one-time tax-free benefit of $1,000 for eligible families and single parents (combined net income below $125,000 with reduced benefits up to net income of $175,000) and $500 for eligible individuals (net income below $62,500 with reduced benefits up to net income of $87,500). 

In closing, we will remind investors of the important lessons reinforced during 2020 – markets are driven by expectations, diversification is important and it is crucial to have a plan and to stick with it, especially during times of turmoil and volatility.  Uncertainty and current news can lead to discomfort for investors but markets are resilient and over the long-run, if you stick with your plan you will have a positive investment experience that helps you achieve what you desire.