January 4, 2021

10 ECONOMIC LESSONS FROM 2020

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

2020 was a year characterized in part by the outbreak of a global pandemic, which captivated the world and shocked the global economy and financial markets. As we turn the page to 2021, it can be helpful to reflect on the lessons learned from such a historic year. We offer 10 economic lessons we’ll remember from 2020.

A YEAR TO REMEMBER

To say that 2020 was a unique year would be an understatement. What began as an ordinary year quickly turned into an extraordinary one—does anyone even remember it was a leap year? Initial reports in early January noted that a novel virus was beginning to spread, but few at the time could comprehend how the situation would escalate. By March, the COVID-19 pandemic gripped the entire world. So after such a tumultuous year, what have we learned?

10 TAKEAWAYS FROM 2020

The world is full of surprises. When we published our Outlook 2020 in December 2019, we did not forecast a recession in the United States. Heading into 2020, the economy was growing modestly—we didn’t see the usual extremes like excessive spending or over leverage that have been the hallmarks of the end of past economic cycles. The outbreak of COVID-19 forced the economy to slam on the brakes as much of the world went into lockdown to contain the spread, ending the longest economic expansion ever—one that had lasted more than 10 years.

November 23, 2020

FROTHY SENTIMENT RIDES BULLISH TECHNICALS

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Scott Brown, CMT, Senior Analyst, LPL Financial

The post-election environment and positive developments toward a COVID-19 vaccine have led to a surge in stock prices. The added clarity on these two fronts has boosted sentiment, which may present a risk in the near term as stock prices are near all-time highs.

A NOVEMBER TO REMEMBER

The reaction from stocks since the US election has been truly impressive. The S&P 500 Index is up 8.8% for the month, on pace to be the best November for the S&P 500 in 40 years. Small caps have also soared, with the Russell 2000 Index up 16%, which would be its second-best month ever. Although we remain longer-term bullish on equities, there are some signs that sentiment could be getting a little frothy at the moment, which could increase the odds of a pullback.

TECHNICALS SUPPORTIVE OF FUTURE STRENGTH

On November 9, more than 71% of the stocks in the S&P 500 hit a one-month high, the third-highest reading using data back to 1990. Not only does this tell us that participation in the post-election rally has been extremely broad and not limited to only a few heavily weighted names in the index, but historically this has been an extremely positive signal for the next year. Returns can be quite weak in the near term after more than 65% of stocks reach a one-month high, but returns over the next 12 months not only have been far above average, but have been positive in all seven observed instances [Figure 1].

November 2, 2020

RECORD GDP ON THE EVE OF THE ELECTION

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Barry Gilbert, CFA, PhD, Asset Allocation Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

2020 has been a year of records, both record losses and record gains. After a brutal spring, markets and the economy have mostly rebounded in the summer and fall. We take a closer look at October 26’s record gross domestic product (GDP) report, which may have implications for the upcoming presidential election.

RECORD GROWTH IN THE THIRD QUARTER

The outbreak of COVID-19 and the subsequent lockdowns triggered the largest quarter-over-quarter decline in GDP since WWII, so perhaps it comes as no surprise that the following quarter tallied the sharpest rebound in that same time period. GDP grew 33.1% annualized in the third quarter, ahead of Bloomberg consensus estimates of 32% and reversing much of the economic fallout stemming from COVID-19-related lockdowns. The largest segment of the US economy—consumer spending— rebounded in a big fashion, while business investment and inventories also helped fuel the surge in growth [Figure 1]. Residential investment also gained momentum in the third quarter, driven by pent-up demand, the work-from-home trend, and historically low mortgage rates.