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 overleverage 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.
Records are meant to be broken. As the imposition of stay-at-home orders kept the US consumer from spending, gross domestic product (GDP) declined a record 31% in the second quarter and unemployment skyrocketed to a post-WWII record 14.7%. When the US economy began to recover from the lockdowns, GDP rebounded 33% in the third quarter, also a record. This set the stage for what potentially could be the shortest recession on record—to be determined when the end of the recession is officially marked by the National Bureau of Economic Research. As we discussed in this year’s Outlook 2021: Powering Forward, we now expect US GDP growth of 4-4.5% in 2021 [FIGURE 1].
Stimulus matters. A historic recession required a historic policy response. Many speculated that the Federal Reserve (Fed) was out of ammunition, but policymakers proved doubters wrong. The Fed effectively lowered interest rates to zero, expanded its balance sheet by record amounts (15% of US GDP), and even ventured into purchasing corporate bonds—both investment grade and high yield—to restore function to markets and support corporate borrowing. Meanwhile, Congress passed record amounts of fiscal stimulus (totaling roughly 10% of US GDP in 2020), including small business lending and direct payments to households, to help lift the economy as it emerged from lockdowns.
The path of returns typically isn’t a straight line. Ideally, the low-volatility/high-return environment of 2017 would have been the norm at this point of an economic cycle, but unfortunately it wasn’t. 2020 brought us the fastest bear market in history (down 20% from the highs), with the S&P 500 Index reaching that level in just 16 trading days on its way to a peak drawdown of roughly 34%. Supported by historic stimulus measures, stocks rebounded off the lows to climb back to new all-time highs in only 106 trading days. 2020 also was the only year when stocks experienced a 30% drawdown and managed to finish the year in positive territory.
Markets can experience extraordinary short-term disruptions. At the height of the March volatility, we saw multiple Sundays when S&P 500 futures traded limit-down—when circuit-breaker mechanisms kicked in to prevent further losses. Then during regular trading sessions, stocks experienced trading halts triggered by large intraday losses. While the orderly operation of stock markets had returned by April, oil futures were not out of the woods. Global lockdowns caused energy demand to plummet and maxed out the capacity of supply tankers, sending the price of the April WTI crude oil contract into negative territory—implying someone literally would pay you to take delivery of their oil.