Year in Review 2020

Soon, we leave behind a turbulent stock market year. Stockbroker Lars Jedemark summarizes the year and gives his perspective on the outlook for 2021.

2020 was one of the most peculiar stock market years I have experienced in my 35 years in the finance industry. From the peak in February, the index fell by -35% - and has now risen by +63% from the bottom.

With hindsight, we can conclude that the best strategy was to "stay the course" and go with the waves.

Throughout the year, we have seen significant stimuli from central banks leading to suppressed interest rates, which, in turn, has resulted in, for example, a BBB bond trading at 0.6–0.7%; that is, half the inflation.

The low-interest rates have also meant that the valuation of stocks has increased. Today, the forward-looking P/E ratio in Sweden is 17-18. S&P 500 is over 20. With the low required return we have today, one can justify a P/E around 50–100 with an annual growth of 20–25%. Imagine if the market lowers the requirement to, say, 5.5%. Then one could easily accept an average P/E number of 18.

When S&P 500 has been valued over P/E 20, the stock market has gone -0.9% the following year. Now, admittedly, the FAANG companies (Facebook, Apple, Amazon, Netflix, and Google) have come to dominate the index, making a historical comparison somewhat flawed. Another bubble warning is that the number of IPOs in the USA has exploded. The number of IPOs that have doubled the price on the first day is now over 20 for 2020, compared to the historical average of about 1 to 3.

The launch of vaccines has led to a sharp rise for so-called "corona losers" in the cyclical, banking, and energy sectors. I do not see it as a sector rotation but rather a normalization of prices. Many of the major industrial companies are near all-time highs (ATH) and have risen by 15–20% this year. Before the pandemic, we had weak underlying growth that required growth stimulus. This still applies. Companies that can benefit from new technology, environmental investments, and Fintech are future winners. Acquisition activity has increased, and mid- and small-cap companies will be courted.

One of the biggest threats to the stock market is if there are inflationary impulses in the economy due to the substantial stimuli set up because of COVID-19. It could lead to a long-term rise in interest rates. So far, this has been dismissed as money has stayed in the system and not gone to increased consumption, reminiscent of Mats Qviberg's words, "You should always guess that the stock market goes up because then you are right in 70% of cases."

How did the investment year 2020 end? My significant Swedish reference portfolio has risen by +45% this year compared to an index that has risen just over +13%. Since its inception in May 2019, the reference portfolio has risen by +75% compared to an index that has risen around +30% for the same period.

Looking ahead, I believe that 2021 will be characterized in the short term by vaccine news and decided stimuli, where broad indices do not rise much. However, there may be sharp increases in individual stocks.