To say 2020 has been tumultuous is an understatement in itself. In this article, we’ll glance back at some of the highlights of the year, through the lens of the market.
- The overall market performance in 2020 and some historical context.
- Stay-at-home stocks were the big winner.
- And the oil investment that you made in May 2020? Turned out to not be such a great idea.
- Don’t fall into the IPO FOMO.
The performance of the US market
Profits are down in 2020, but are expected to rebound in 2021
The pandemic and the resulting prolonged lockdown affected the overall profitability of companies in the S&P 500. Altogether, in 2020, the earnings per share (EPS) of the S&P 500 is expected to decline by 14.6%, compared to 2019 (Figure 1).
Nevertheless, released pent up demand in 2021 is expected to propel profits, once the pandemic is under control, vaccines are distributed, and we have some semblance of resumption of economic activities. The EPS of the S&P 500 is expected to increase by 21.8% in 2021 and then by another 17% in 2022 (bearing in mind the further the projection, the less accurate it will be). A similar rebound in EPS was observed in 2010 and 2011, after the great financial recession of 2008 – 2009.
Despite a drop in profits, returns remained positive for 2020
Despite the turmoil in 2020, S&P 500 returns stayed positive (about 15% or so). In fact, 2020 returns rank 46th highest for one-year-return of the S&P since the index’s inception in 1926.
The positive returns have largely been driven by technology and various stay-at-home stocks. These stocks have outperformed the market by a significant margin. See Figure 3.
Are these stocks overpriced? Well, it depends. Some of these businesses have grown tremendously during the pandemic, expanded their total addressable market and grown their revenue, and as a result, boosted their profitability. See Figure 4 for the year-over-year change in the last twelve months (LTM) EPS of these stay-at-home companies versus its share price gain year-to-date.
- Zoom has become something of a verb. It is likely that the market share that the company has gained will hold out after the pandemic. Yes, the company is richly valued. Its share price has not only gone up 480% year-to-date, but it has also grown its revenue 3.7 times (Q3 2020 in comparison to Q3 2019) and increased its EPS by 2,300% (TTM EPS Q3 2020 vs. Q3 2019)
- Ecommerce has been one of the biggest winners of 2020. Peloton, Etsy, Wayfair and Shopify gained between 160% – 300% this year alone. The gain in share price has been accompanied by a gain in revenue and increased profitability.
If you had invested in oil ETFs in May, you would’ve missed out on the broader stock market rally
In April and May, we saw many retail investors interested in investing in oil. At the time, oil price cratered as demand for oil plummeted due to the global lockdown. Thinking that the downturn was temporary, many retail investors rushed in to invest in oil, primarily using future contract ETFs (such as USO) and investments in oil companies.
We then proceeded to write multiple articles explaining the complexities of investing in such ETFs and outlining that the issue of oil price is due to supply/demand imbalance (there’s too much oil being produced and not enough demand because of the global lockdown). This issue was made worse by the fact that oil supply in storage was also at an all-time high.
As we near/reach the end of 2020, oil prices still have not fully recovered (Figure 5 summarizes the percent change of US domestic oil prices). Overall, it’s still down YTD.
Note however, it is only until recently that oil prices have rebounded. Optimism of the vaccine has helped prices recover somewhat (oil price is up 26% from its lows in October).
2020 turned out to be a strong year for IPOs
Despite the volatilities, 2020 turned out to be a good year for companies to go public. That said, even though there is constant hype around IPOs and share pop that you often see after the first day of trading, investing in IPOs typically does not generate good returns.
In Figure 6, we show the six months returns (assuming you had invested the first day the company went public) of companies that went public between 2015 – 2020 (715 companies).
The average 6 months returns after IPO is 2%, while the median is 1%. In contrast, the average rolling six months returns of the S&P 500 over the same period is 4% (median is 4.4%). More often than not, you are better off investing in the S&P 500 index. In other words, don’t let the fear of missing out (FOMO) influence your investing decision.
Why is 6 months important? Typically, when a company goes public, the insiders (management, private investors) have to hold onto their stock for six months before they sell. This is called a lockup period. The company share price can move wildly during this period.