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2020 - A Year In Review

The year started with Australia burning, and a mere trifle involving the US assassination of a top Iranian general on Iraqi soil. The protests, and Iranian retaliation, that followed had some pundits worried about the prospects of (more) war in the Middle East. Oil prices jumped to reflect the tension, peaking at over $70 a barrel in the days that followed.

It was not long before oil prices made a sharp about face, astonishingly falling to negative $37.63 a barrel in April as storage concerns caused traders to sell to avoid being lumped with ever increasing storage costs,  this type of volatility was par for the course in 2020. In a similar vein the table below shows how the NZX50 reached all-time highs in February before the historic Covid-19 led retraction of 32% in little over a month. The market then rebounded to reach new highs in August with the market continuing to build strongly from there.

In hindsight, the warning signs for Covid-19 were there in January and February. Chinese authorities first advised the World Health Organisation of cases of pneumonia of unknown cause, originating in Wuhan, on the 29th of December. By mid-January, cases were being reported outside of China. On the 3rd of February, New Zealand put a travel ban in place on foreigners from, or who have travelled through, mainland China. By the end of February more cases being reported outside of China, than are being reported inside.

Towards the end of February, the share market started to drift lower on this worry. New Zealand reported its first case of Covid-19 on the 28th of February. The NZX50 then dropped 6.7% from its highs in the week ending 28th of February. It would recover slightly the next week, before weakening further and entering a bear market on the 13th of March. Lows would be hit on the 23rd of March, the Monday after the New Zealand government announced their alert level system, and 2 days before New Zealand entered alert level 3.

Alert level 4 would follow 2 days later, and New Zealand entered a period unlike anything in our history. Level 4 in New Zealand introduced some of the harshest lockdowns in the western world. New Zealand would remain at level 4 for the next 34 days. Another 16 days later, we entered level 2, and some degree of normalcy.

The economic impact of the lockdown was hard to gauge at first. New Zealand ingenuity, and desire to make do in a crisis, may have been underestimated by economists, as initial estimates saw predictions of mass unemployment, house price crashes, and a long-term depression. The retraction in the share market at this point also pointed to a long and slow recovery.

Economists may have also underestimated the scale of the fiscal response to the crisis. World Governments, Reserve Banks, and Federal Reserves unleashed an unprecedented level of stimulus. The table below shows the balance sheet of the Federal Reserve of the United States. Their balance sheet started to increase in response to the Global Financial Crisis in 2008, doubling to over 2 trillion in assets (mostly US government debt). The stimulus of 2008 pales in comparison to what we saw this year, with the balance sheet now topping $7 trillion in assets, and now including bank & corporate debt. At the same time Governments across the world have injected funds into the economy across the board.

The harsh lockdowns, and the hardship it fostered, forced the New Zealand government to spend. Wage subsidies were put in place to help businesses maintain employment. Business owners found ways to keep operating under tough circumstances. The Reserve Bank of New Zealand follows up their 75 basis point (0.75%) drop in the official cash rate with record levels of debt purchases. The buying of New Zealand government debt by the Reserve Bank helped to push New Zealand Government debt to the lowest ever level, dropping into negative territory in September, October and November.

The Official Cash rate of New Zealand has remained at 0.25% and is likely to stay near that level for the foreseeable future.

This has seen Term Deposit rates fall off a cliff. Rates at the big four banks are below 1%p.a. for most durations, something New Zealand income investors have not had to face before. The flip side of that coin is record low home loan rates, which has seen the New Zealand housing market become over heated.

Whilst all this was occurring two historic election results were unfolding. Labour became the first Party in New Zealand history to receive 50% of the vote in an election, and Joe Biden received more votes than any person is US history in his victory over Donald Trump. Both results were met with relatively benign reactions in the market when compared to the volatility we saw throughout the rest of the year.

This volatility saw the Dow Jones record 2 of its top 5 worst days in history this year.  As a result 2020 has joined 1987, and 1929 as notable mentions in market volatility.

Perhaps, when the traumas of 2020 have passed and we look back it will stand out, not for those negative down days, but more for the velocity of the recovery. Long may it continue.

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