Covid-19 Fuelled S&P 500 Selloff Last Year. Here Are Some Lessons Learned.
Money managers reflect on what the ups and downs of 2020-2021 have taught them.
4 min
A year ago, the longest-ever bull market ended.
The comeback in the stock market since then has been nothing short of astounding.
The S&P 500 took just 126 trading days to swing from a record to a bear market and back to a new high—marking the fastest such recovery in history. That was even as market prognosticators warned stocks were due for another bout of selling, based on the growing death toll and unprecedented job losses caused by the coronavirus pandemic.
The U.S. is still in the midst of the same pandemic that led to the spring selloff. And the market’s future remains mired in uncertainty. Just last week, surging bond yields sent many of the most popular technology stocks of the past decade sliding.
The stock market is now barely above the point where it began the year. This coming week, traders say they will be keenly focused on inflation data, which may add to the recent debate over whether inflationary pressures are picking up.
Whatever the data show, many investors say the ups and downs of the past year have reminded them that some investing truths are eternal. Among them:
The markets look way ahead of us
Stocks bottomed out March 23. The next day, a furious rally sent the Dow up more than 11% for its best session since 1933.
The pandemic was far from over. In the same week, politicians and health experts declared New York City the epicentre of the coronavirus pandemic, the U.K. went into lockdown and Japan postponed the Tokyo Olympics.
How was a market rally possible?
Investors like to cite the adage that markets are forward-looking. There is no clearer example of that in recent memory than what happened last year.
Those buying stocks last spring weren’t necessarily doing so out of a belief that the pandemic was close to an end. They were betting on the future turning out to be better. And they were right. Companies are expected to report a 3.9% increase in earnings for the fourth quarter of last year. That is a modest increase, but nevertheless would mark the first quarter of year-over-year growth since the end of 2019, according to FactSet.
An investor waiting for a clear turning point on the pandemic—say, the first vaccine approval—would have missed much of the market’s ride higher.
“It’s hard, it feels counterintuitive for a lot of investors, but if you only focus on buying things that were loved in the past, you’ll always be buying high and selling low,” said Don Calcagni, chief investment officer of Mercer Advisors.
The moment was also fleeting for stay-at-home stocks. Many of them soared in the first half of last year. But as scientists pushed closer to developing safe and effective vaccines, momentum for those trades faded. Domino’s Pizza Inc., Zoom Video Communications Inc. and McCormick & Co. have one thing in common: their shares peaked last fall.
What was bad news for stay-at-home stocks was good news for companies in the travel business, which began rallying in the final months of 2020. While the S&P 500 is essentially flat this year, Norwegian Cruise Line Holdings Ltd., American Airlines Group Ltd. and Delta Air Lines Inc. have notched double-digit increases on a percentage basis.
Cycles move quickly
If last year’s selloff felt like it happened with vicious speed, that is because it did. It took just 16 trading days for the S&P 500 to fall from its Feb. 19 record into a bear market, or a 20% drop from that high. That marked the index’s fastest-ever such descent, according to Dow Jones Market Data.
The comeback that followed was also historically swift. (Though it probably didn’t feel like it for weary traders.)
“You’re really going to either have to play the speed game all the way around, or you gotta grin and bear it, be patient and just hang on and really stick to your buy and hold strategy,” said Richard Grasfeder, senior portfolio manager at Boston Private.
The pace of the action in more speculative corners of the market—think bitcoin, dogecoin or any of the “meme stocks”—has been even wilder.
On Jan. 28, for instance, GameStop Corp. started the trading day at $265, down 24% from the prior afternoon. It swung as high as $483 and as low as $112.25 before ending the day somewhere in between at $193.60.
“The fact that with technology, information moves so fast…I think you can make the case that it has really sped up market cycles,” said Ben Carlson, director of institutional asset management at Ritholtz Wealth Management.
Stock pickers love volatility, but it doesn’t always love them back
The feeling that markets are moving faster than ever should be a boon to active managers. Analysts have long argued that the professionals have the best opportunity to prove themselves when there is plenty of dispersion: meaning the gap between the market’s losers and winners is wide.
But that didn’t pan out in the first half of 2020, a period rife with volatility. Just 37% of U.S. large-cap equity funds managed to beat the S&P 500 over the first six months of last year, according to S&P Dow Jones Indices. (The firm hasn’t yet released its full-year report on active managers.)
Will stock pickers buck the trend in 2021?
So far, they are off to a good start. Bank of America found 70% of U.S. large-cap mutual funds beat their benchmarks in February, the highest share since 2007.
Much of that outperformance appears to have been driven by the fact that technology stocks have underperformed lately. Technology has a big pull on market cap-weighted indexes like the S&P 500, so active managers who haven’t heavily weighted the sector in their own funds have historically struggled to beat the market. This year, it seems a number of fund managers got the timing right. Many are holding on to more shares of companies like banks, utilities and energy producers, which have held up better in the market pullback.
On the other hand, investors who have made a name for themselves betting big on technology have been stung by widening losses. Among the highest-profile casualties of the past few weeks: Cathie Wood’s ARK Investment Management LLC, whose funds have sizable holdings in companies like Tesla Inc., Roku Inc. and Square Inc.
The growth versus value debate has played out countless times over the past decade, with little reward for value investors. But with rising interest rates putting pressure on long-loved corners of the market, money managers like John Allen, chief investment officer of Aspiriant, are feeling hopeful.
“We believe this is going to be a decade where active investing prevails,” Mr Allen said.
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Consumers are going to gravitate toward applications powered by the buzzy new technology, analyst Michael Wolf predicts
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Supplier Foxconn plans to build more factories and give India a production role once limited mostly to China
4 min
Apple and its suppliers aim to build more than 50 million iPhones in India annually within the next two to three years, with additional tens of millions of units planned after that, according to people involved.
If the plans are achieved, India would account for a quarter of global iPhone production and take further share toward the end of the decade. China will remain the largest iPhone producer.
Apple has gradually boosted its reliance on India in recent years despite challenges including rickety infrastructure and restrictive labor rules that often make doing business harder than in China. Among other issues, labor unions retain clout even in business-friendly states and are pushing back on an effort by companies to get permission for 12-hour work days, which Apple suppliers find helpful during crunch periods.
Apple and its suppliers, led by Taiwan-based Foxconn Technology Group, generally believe the initial push into India has gone well and are laying the groundwork for a bigger expansion, say people involved in the supply chain.
Apple is emblematic of a move among companies worried about over dependence on China to move parts of their supply chains elsewhere, most often to Southeast Asia and South Asia. Diplomatic efforts by the U.S. and its allies to block Beijing’s access to advanced technology and strengthen ties with New Delhi have accelerated the trend.
The first phase of a Foxconn plant under construction in the southern state of Karnataka is expected to start operating in April, and the plant aims to make 20 million mobile handsets annually, mainly iPhones, within the next two to three years, said people with direct knowledge of the construction plans.
A further iPhone-producing mega plant is on Foxconn’s drawing board with capacity similar to the one in Karnataka, although the plans are still in a nascent stage, the people said.
Apple has also chosen India as its site for a manufacturing stage for lower-end iPhones to be sold in 2025. In this stage, known as new product introduction, Apple’s teams work with contractors in translating product blueprints and prototypes into a detailed manufacturing plan. Until now, that work was done only in China.
Combined with plans for expanded production at an existing Foxconn plant near Chennai and at another existing plant recently bought by Indian conglomerate Tata, these developments signify that Apple intends to have the capacity to make at least 50 million to 60 million iPhones in India annually within two to three years, said people involved in the planning.
Annual capacity could grow by tens of millions of units after that.
Foxconn indicated its commitment to India by announcing on Nov. 27 that it was investing the equivalent of more than $1.5 billion in the country, money that people familiar with the matter said would include production for Apple. The announcement didn’t mention the iPhone or name specific locations.
Global iPhone shipments last year totalled more than 220 million, according to research firm Counterpoint, a number that has remained steady in recent years. Because almost all iPhones are made in either China or India, China will continue to account for well over half of iPhone output.
Apple has faced challenges in China this year beyond trade tensions with the U.S., including the Chinese government instructing some officials not to use iPhones at work.
“India’s trust factor is very high,” said Ashwini Vaishnaw, India’s information technology minister.
This year, for the first time, India-made iPhones were introduced on the first day of global sales of the latest model, eliminating the lag with China-made phones.
Supply-chain executives say hourly wages are now significantly lower in India than in China, but other costs such as transport remain higher, and labor unions sometimes resist rule changes sought by manufacturers.
In May, the chief minister of Tamil Nadu state, where Foxconn’s flagship Chennai plant is located, said he would withdraw regulations allowing a 12-hour workday, weeks after the state passed an amendment authorising the longer hours. The chief minister, M.K. Stalin, attributed the decision to opposition from labor activists.
Karnataka state has stood by a decision earlier this year to extend the workday to 12 hours, up from a previous limit of nine hours, though companies must seek approval to do so. A state labor official, G. Manjunath, said new rules also allow companies to employ women on overnight shifts without seeking government approval.
After years of battling local-content rules and other red tape, Apple this year opened its first retail stores in India. Abhilash Kumar, an India-based analyst at TechInsights, said the top-of-the-line iPhone 15 Pro Max was selling well in the country, though it costs about $700 more than in the U.S.
Apple is also making progress in India toward building a network of core suppliers, long a strength of Chinese manufacturing. Officials said this week that Japanese battery maker TDK would build a new factory in India’s Haryana state to manufacture battery cells to power Indian-made iPhones. A TDK spokesman declined to comment.
The moves don’t mean Apple and its suppliers are leaving China. Apple Chief Executive Tim Cook has traveled to China twice this year, stressing the country’s importance as a production hub and consumer market. He visited Luxshare, a China-based assembler that is taking a bigger role in the China portion of iPhone assembly.
On social media, Apple has assured Chinese consumers that iPhones selling in authorised channels are made in China. At an industry event in Beijing that Chinese premier Li Qiang attended in late November, Apple’s booth stressed the company’s business with Chinese suppliers.
Foxconn Chairman Young Liu said in November that China would continue to account for the largest share of Foxconn’s capital investment next year.
Liu has visited India at least three times in the past year and a half, meeting Prime Minister Narendra Modi and other officials. People involved in the planning said Modi’s home state of Gujarat in the west was one possible site of a future Foxconn plant. Meanwhile, the company has other projects in the works in the southern half of the country for electronic components and a plant likely to focus on making AirPods for Apple.
The plant in Karnataka state is under construction on 300 acres of land near the airport in Bengaluru, a southern city that is considered India’s tech hub. Officials involved in the planning said Foxconn has secured approval to invest nearly $1 billion in the plant and is seeking the go-ahead to put in an additional $600 million or so.
Combined with other projects, Foxconn’s investments in the state are likely to reach around $2.7 billion, they said.
Some iPhones are also made at a plant near Bengaluru that India’s Tata Electronics agreed in October to buy from Taiwan’s Wistron. Tata Group is the first local company to take on manufacturing iPhones.
“Apple has created an additional spoke in its India strategy by roping in the country’s largest business group—Tata—to be a part of its manufacturing system in addition to Foxconn,” said India’s junior information-technology minister, Rajeev Chandrasekhar.
—Shan Li in New Delhi and Selina Cheng in Hong Kong contributed to this article.
Consumers are going to gravitate toward applications powered by the buzzy new technology, analyst Michael Wolf predicts
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
