Say what you will about 2020, everyone can agree that it’s been a year of firsts. We’ve seen new all-time highs and historic lows and we’ve experienced governments and central banks taking actions that would have seemed like fake news last year; all against a backdrop of looming health, social and economic crises. How many times have you seen or heard the word “unprecedented” in the news this year? The first of January will see us all stepping into a new year, but also into a new world. With that in mind, we had a look back at some of the historic events that transpired in 2020.
One thing that was definitely not on the agenda for 2020 was ‘business as usual’. As humans we love business as usual and want to preserve it at all costs, but it just wasn’t on the cards last year. Markets too, being huge amalgamations of public sentiment, also love business as usual, and they were caught a little off-guard. The Wuhan outbreak was initially publicised at the end of 2019. By March 2020 it had spread to over 100 countries across the globe, with four initial hotspots: China, South Korea, Iran, and Italy.
When markets finally grasped the magnitude of the problem, the S&P 500 experienced its fastest 10% plunge from an all-time high in history. The move was even faster than the fabled Black Monday crash of 1987 and represented the worst losses US equity markets had seen since the Great Recession. By the beginning of March, $4.3 trillion, almost the complete US Federal Budget for 2019, had gone up in smoke.
At the time, the economic data was still referencing periods of activity that took place pre-coronavirus and, across the board, everything was pointing to an economic slowdown even before the pandemic properly took hold. European Flash Manufacturing and Services PMIs were praised for their growth in February, despite both being in contraction. Similarly, Australian capital expenditure and operating profits fell off in Q4 of 2019. In the US, durable goods orders and PCE both contracted. However, it was the Chinese data that indicated what the rest of the world still had in store. Chinese manufacturing PMI crashed from 50 in January to 35.7 in February. This was an all-time low that hadn’t even been reached during the Great Recession.
Oil has also had a pretty turbulent year. In early March, OPEC+ members assembled to negotiate the cutting of 1.5 million barrels of crude oil production per day in order to buoy the price of the commodity in the face of tanking global demand. Russia pushed back, stating it could continue the existing agreed-upon cuts for a further three months, but would not be willing to go any further. Then, Saudi Arabia sparked a price war by slashing its official prices for April by $6-8 per barrel. West Texas Intermediate dropped by 28%, its largest slide since the first Gulf War in 1991. This was just a prelude.
A month later, West Texas Intermediate crashed. We overuse the word crash in financial analysis, so much so that it doesn’t cover what happened. West Texas didn’t just stop at zero, it went further, briefly trading below zero on spot markets and well below that on futures markets for the first time in history. How’s that for a first? 15 years ago we were fretting about peak oil and in April of 2020, its price goes negative.
Keep in mind that oil futures are for physical delivery, so with storage facilities in North America almost full, bids quickly disappeared from the market as people began searching for anyone to get rid of those oil contracts to. Traders were actually paying to have oil futures contracts taken off their hands!
The mind boggles when looking at the public debt figures we were throwing around back then compared to now. Between 2015 and 2018, the US Federal Reserve was “tightening” to reverse a balance sheet that had ballooned from $925 billion in 2008 to $4.5 trillion in 2017. It ceased issuing new bonds, and continued to pay existing obligations, thus reducing the money supply. Post-coronavirus, that $4.5 trillion figure has ballooned again, to $7.1 trillion, undoing all the Fed’s tightening and increasing the debt by almost 60%.
Federal Reserve Balance Sheet 2015-2020. Source TradingEconomics
The interest rate situation couldn’t be more different now either. By the end of 2018, the Fed Funds Rate was sitting at 2.25%, after being incrementally ratcheted up between 2015 and 2018. Today it’s right back at the zero bound of 0-0.25% and there’s much speculation about whether the Fed will have to capitulate in 2021 and go negative for the first time in its history.
Fed Funds rate, 1995-2020. Source: TradingEconomics
Riots and All-Time Highs
On June 5, with social outrage sweeping the land in the wake of George Floyd’s killing, the Nasdaq recorded an all-time high, breaking above 10,000 for the first time in its history. A starker contrast is rarely seen; a populace beaten down by a pandemic and financial crisis, unemployment at its highest level since the Great Depression, and the Nasdaq was sitting on top of the world.
The bounce we saw in response to March’s lows was certainly not of the dead cat variety; it was real. The S&P 500 was still well off its own highs but had broken above its 62% retracement level, which can often act as a solid resistance during bear market bounces.
It certainly was strange to see some US cities in a state of unrest during a pandemic as the largest 5 US stocks (Amazon, Apple, Facebook, Google and Microsoft) consolidated their share of the S&P market cap to 1/5.
If anything, the wild swings of fortune we saw in 2020 have taught us to be prepared for all eventualities and to not be complacent in any kind of trade. 2021 is also likely to be turbulent, with the entire world facing successive waves of infection, and the economic consequences of our attempts to contain them. Beyond that, we have a world that seems to want to redraw itself. Britain will no longer be a part of Europe, China’s relationship with the US is anyone’s guess, the USD’s role as the global reserve currency is not guaranteed, Bitcoin’s making fresh highs, and digital currencies are on the way. Suffice to say, we’re stepping into the unknown, but that’s also where opportunities lie in wait.