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.
Money managers reflect on what the ups and downs of 2020-2021 have taught them.
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:
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.
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.
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.
Following the devastation of recent flooding, experts are urging government intervention to drive the cessation of building in areas at risk.
Private club memberships and luxury cars are some of freebies on the table.
When Ryan Wolitzer was looking to buy an apartment in Miami Beach late last year, several beachfront properties caught his eye. All were two-bedroom homes in high-end buildings with amenities aplenty and featured glass walls, high ceilings and an abundance of natural light. But only The Continuum, in the city’s South of Fifth district, came with a gift: a membership to Residence Yacht Club, a private club that offers excursions on luxury yachts ranging from a day in south Florida to a month around the Caribbean. Residents receive heavily discounted charters on upscale boats that have premier finishes and are stocked with top shelf spirits and wine. Mr. Wolitzer, 25, who works for a sports agency, was sold.
“The access to high-end yachts swayed my decision to buy at The Continuum and is an incentive that I take full advantage of,” Mr. Wolitzer said. “It’s huge, especially in my business when I am dealing with high-profile sports players, to be able to give them access to these incredible boats where they experience great service. I know that they’ll be well taken care of.”
Freebies and perks for homeowners such as a private club membership are a mainstay in the world of luxury real estate and intended to entice prospective buyers to sign on the dotted line.
According to Jonathan Miller, the president and chief executive of the real estate appraisal and consulting firm Miller Samuel, they’re primarily a domestic phenomenon.
In the U.S. residential real estate market, gifts are offered by both developers who want to move apartments in their swanky buildings and individuals selling their homes. They range from modest to over-the-top, Mr. Miller said, and are more prevalent when the market is soft.
“When sales lag, freebies increase in a bid to incentivize buyers,” he said. “These days, sales are slowing, and inventory is rising after two years of being the opposite, which suggests that we may see more of them going forward.”
Many of these extras are especially present in South Florida, Mr. Miller said, where the market is normalizing after the unprecedented boom it saw during the pandemic. “The frenzy in South Florida was intense compared with the rest of the country because it became a place where people wanted to live full time,” he said. “Now that the numbers are inching toward pre-pandemic levels, freebies could push wavering buyers over the finish line.”
Kelly Killoren Bensimon, a real estate salesperson for Douglas Elliman in Miami and New York, said that the gifts that she has encountered in her business include everything from yacht access and use of a summer house to magnums of pricey wine. “One person I know of who was selling a US$5 million house in the Hamptons even threw in a free Mercedes 280SL,” she said. “They didn’t want to lower the price but were happy to sweeten the deal.”
A car, an Aston Martin to be exact, is also a lure at Aston Martin Residences in Miami’s Biscayne Bay. Buyers who bought one of the building’s 01 line apartments—a collection of 47 ocean-facing residences ranging in size from 325 to 362sqm and US$8.3 million to US$9 million in price—had their choice of the DBX Miami Riverwalk Special Edition or the DB11 Miami Riverwalk Special Edition. The DBX is Aston Martin’s first SUV and retails for around US$200,000. It may have helped propel sales given that all the apartments are sold out.
The US$59 million triplex penthouse, meanwhile, is still up for grabs, and the buyer will receive a US$3.2 million Aston Martin Vulcan track-only sports car, one of only 24 ever made.
“We want to give homeowners the chance to live the full Aston Martin lifestyle, and owning a beautiful Aston Martin is definitely a highlight of that,” said Alejandro Aljanti, the chief marketing officer for G&G Business Developments, the building’s developer. “We wanted to include the cars as part of the package for our more exclusive units.”
The US$800,000 furniture budget for buyers of the North Tower condominiums at The Estates at Acqualina in Sunny Isles, Florida, is another recent head-turning perk. The 94 residences sold out last year, according to president of sales Michael Goldstein, and had a starting price of US$6.3 million. “You can pick the furniture ahead of time, and when buyers move in later this year, all they’ll need is a toothbrush,” he said.
Then there’s the US$2 million art collection that was included in the sale of the penthouse residence at the Four Seasons Residences in Miami’s Brickell neighbourhood. The property recently sold for $15.9 million and spans 817sqm feet. Designed by the renowned firm ODP Architects, it features contemporary paintings and sculpture pieces from notable names such as the American conceptual artist Bill Beckley and the sculptor Tom Brewitz.
But it’s hard to top the millions of dollars of extras that were attached to the asking price in 2019 of the US$85 million 1393sqm duplex at the Atelier, in Manhattan’s Hell’s Kitchen neighbourhood. The list included two Rolls-Royce Phantoms, a Lamborghini Aventador, a US$1 million yacht with five years of docking fees, a summer stay at a Hamptons mansion, weekly dinners for two at lavish French restaurant Daniel and a live-in butler and private chef for a year. And the most outrageous of all: a flight for two to space.
It turned out that the so-called duplex was actually a collection of several apartments and a listing that went unsold. It did, however, generate plenty of buzz among the press and in real estate circles and was a marketing success, according to Mr. Miller.
“A listing like this that almost seems unbelievable with all the gifts will get plenty of eyeballs but is unlikely to push sales,” he said. “Empirically, it’s not an effective tactic.”
On the other hand, Mr. Miller said that more reasonable but still generous freebies, such as the membership to a yacht club, have the potential to push undecided buyers to go for the sale. “A nice but not too lavish gift won’t be the singular thing toward their decision but can be a big factor,” he said. “It’s a feel-good incentive that buyers think they’re getting without an extra cost.”
Examples of these bonuses include a membership to the 1 Hotel South Beach private beach club that buyers receive with the purchase of a residence at Baccarat Residences Brickell, or the one-year membership to the Grand Bay Beach Club in Key Biscayne for those who spring for a home at Casa Bella Residences by B&B Italia, located in downtown Miami and a residential project from the namesake renowned Italian furniture brand. The price of a membership at the Grand Bay Beach Club is usually a US$19,500 initiation fee and US$415 in monthly dues.
Still enticing but less expensive perks include the two-hour cruise around New York on a wooden Hemmingway boat, valued at US$1,900, for buyers at Quay Tower, at Brooklyn Bridge Park in New York City. The building’s developer, Robert Levine, said that he started offering the boat trip in July to help sell the remaining units. “We’re close to 70% sold, but, of course, I want everything to go,” he said.
There’s also the US$1,635 Avalon throw blanket from Hermes for those who close on a unit at Ten30 South Beach, a 33-unit boutique condominium; in Manhattan’s Financial District, a custom piece of art from the acclaimed artist James Perkins is gifted to buyers at Jolie, a 42-story building on Greenwich Street. Perkins said the value of the piece depends on the home purchase price, but the minimum is US$4,000. “The higher end homes get a more sizable work,” he said.
When gifts are part of a total real estate package, the sale can become emotional and personal, according to Chad Carroll, a real estate agent with Compass in South Florida and the founder of The Carroll Group. “If the freebie appeals to the buyer, the transaction takes on a different dynamic,” he said. “A gift becomes the kicker that they love the idea of having.”
Speaking from his own experience, Mr. Carroll said that sellers can also have an emotional connection to the exchange. “I was selling my house in Golden Isles last year for US$5.4 million and included my jet ski and paddle boards,” he said. “The buyers were a family with young kids and absolutely loved the water toys.” Mr. Carroll could have held out for a higher bidder, he said, but decided to accept their offer. “I liked them and wanted them to create the same happy memories in the home that I did,” he said.
The family moved in a few months later.