A pandemic and global recession are not the usual recipe for stock-market success, but that’s the cocktail investors were served in 2020.
The drink seemed bitter on March 12, when the Standard & Poor’s 500 index’s one-day drop of 9.5% was the biggest since the 1987 crash. The bear market turned out to be the shortest in U.S. history, however, and nine months of rising prices left a sweet aftertaste for anyone who held on through the turmoil.
The S&P 500 ended the year with a 18.4% total return, including dividends, baffling people who thought the coronavirus would have a more lasting effect on stock values.
“It’s been an exhausting, educational, fascinating year,” said Norman Conley, chief investment officer at JAG Capital Management. “I’ve never experienced anything like it.”
After their surprising rally, stock prices are rich by some measures. The S&P 500 trades for 22 times what its companies are expected to earn in 2021, according to FactSet, well above the 10-year average of 17 times earnings.
There are even parallels to the tech bubble of two decades ago. A record flood of initial public offerings included unprofitable firms like data firm Snowflake and food-delivery app DoorDash, both of which soared after their debuts.
Still, market pros argue that 2020’s stock prices look more reasonable than those of 1999 or 2000.
Joe Williams, chief investment strategist at Commerce Trust Co., points to the trillions of dollars that the Federal Reserve and Congress injected into the economy. “There’s a lot of liquidity out there,” he said.
The Fed has committed to keep short-term interest rates near zero for the foreseeable future, making for measly returns on bonds and bank accounts. “I think money will continue to flow into stocks and out of bonds,” Williams said.
The prospect of widespread vaccinations, and an eventual end to the pandemic, also makes investors optimistic. Joe Terril, president of Terril & Co., points to strong growth in Asian countries where the coronavirus is under control.
“If we can get the virus behind us, I think the same thing would happen here,” he said. “There’s a lot of pent-up demand.”
Much of last year’s rally was fueled by a handful of tech companies. Alphabet, Amazon, Apple, Facebook and Microsoft did well as people stayed home and spent more time on their electronic devices.
Ken Crawford, senior portfolio manager at Argent Capital Management, is looking elsewhere for gains in 2021. “There are a fair number of stocks that have not participated in this recovery,” he said. “What you could see is perhaps the big five leaders in the lockdown will stagnate while the rest of the world rises.”
Crawford sees bargains in banks and potential for a comeback by entertainment companies such as Disney. Terril is buying manufacturers and other basic industries.
Conley, meanwhile, isn’t giving up on the big tech firms. “Their earnings have done really well; the fundamentals are there,” he said. “Valuations are not cheap but you can make a case that they are not overly expensive either.”
To be sure, a pessimist can find plenty to worry about. Distribution problems might slow vaccinations, or a new strain of the virus might overwhelm hospitals. Higher inflation might force the Fed to abandon its zero-rate pledge.
But if risks didn’t exist, it wouldn’t be the stock market. With the economy still climbing out of a deep hole, Williams thinks being out of the market right now looks more dangerous than being in it.
“You get the feeling that the economy is ready to explode once vaccinations get to a certain point,” he said. “The economy in the second half of the year could be stronger than we’ve seen in 20 or 30 years.”
Updated to correct S&P 500 total return percentage.
Best and worst St. Louis stocks of 2020
Best and worst St. Louis stocks of 2020
Peabody Energy -74%
The world’s largest private-sector coal miner has fallen on hard times, losing 92% of its value in two years. Peabody took a $1.4 billion writedown on its biggest mine, in Wyoming. A Christmas Eve agreement with lenders let it avoid a second bankruptcy filing in five years, but the long-term outlook for coal is bleak.
Arch Resources -39%
As utilities turn away from coal as a fuel source, Arch has emphasized its mines that produce a grade of coal used in making steel. After a judge blocked a proposed joint venture with rival Peabody, it outlined a strategy for getting out of the thermal-coal market entirely. Arch even took the word “coal” out of its name, substituting the more flexible-sounding “resources.” Investors, though, aren’t keen on coal companies under any name.
Shoe seller Caleres did its part to fight the coronavirus, converting a Wisconsin factory to manufacture face masks for a while, but the pandemic was tough on retailers. All of Caleres’ stores were closed for weeks, and consumers who were working from home didn’t need to buy as many shoes. The shares did bounce back after Caleres reported a boom in e-commerce sales, but in November the company said it would permanently close 133 Naturalizer stores.
Reinsurance Group -29%
When people started dying of COVID-19, life insurers had to pay out more claims than they had expected. That cost Reinsurance Group of America, which essentially sells insurance to insurance companies, a lot of money. RGA said COVID-related claims totaled $161 million in the second quarter and $140 million in the third quarter.
Enterprise Financial -28%
Like other banks, Clayton-based Enterprise Financial earned some nice fees from the federal Paycheck Protection Program. A bigger loan-loss provision and lower interest rates, though, contributed to a 29% profit decline through the first nine months of 2020. Enterprise’s big strategic move was the purchase of Seacoast Commerce Bank, with offices in San Diego and Las Vegas.
Allied Healthcare Products +300%
Speculators have been pushing up Allied’s stock price since the pandemic began in China, on the assumption that the world would need more of the company’s ventilators. In September, the tiny St. Louis company finally confirmed that it was, indeed, experiencing “previously unseen levels” of demand for its respiratory products.