New York (CNN Business). The Dow and S&P 500 started and ended this unprecedented year at record highs – with a lot of volatility along the way.
All three major indexes closed higher on Thursday, the last trading day of the year. The Dow (INDU) closed 0.7%, or 197 points, higher and the broader S&P 500 (SPX) rose 0.6%. The Nasdaq Composite Index (COMP) climbed 0.1%, nearly hitting a record high on Monday.
“2020 is coming to an end,” wrote Paul Hickey, co-founder of the Bespoke Investment Group in a note to clients. “Unfortunately, 2021 will be a lot like 2020, but hopefully by the end of the year it will be more like something better. While the economy is nowhere near where it was before the pandemic, the rise in the stock market suggests otherwise. All three benchmarks finished the year with growth for the second consecutive year.
This year, the Dow is up 7.3% and the S&P is up 16.3%. It was the NASDAQ’s best year since 2009 with 43.6% growth. In early 2020, investors feared there would be less tailwinds in the market as the Fed stopped cutting interest rates and the economic boost from Trump’s tax cuts ended. In addition, the trade agreement between the United States and China was still hanging in the balance. But how little did they know that they were about to fall off the cliff.
After hitting record highs earlier in the year, the market began shaking with fear of the coronavirus pandemic in February and boosted sales in March when isolation measures were taken in the United States. The Dow regularly set new records for the biggest one-day drops in history, and the New York Stock Exchange had to suspend trading in the S&P 500 several times because the index was falling too fast.
Meanwhile, worried investors were buying up whatever 10-year US Treasury bonds they could find to hedge their investments, bringing the bond’s yield below 1% in March for the first time in history. But in the months that followed, as the economic pain of the pandemic continued, the stock market recovered faster than many expected.
This was helped a lot by the unprecedented intervention of the Federal Reserve System, which lowered interest rates and launched many lending mechanisms to support markets and the economy. Meanwhile, oil investors were shocked when commodities sold off in April and the price of US oil for delivery in May turned negative as oversupply, storage fears and demand worries during the pandemic coincided.
“This year has been a year with many reminders for investors: number one, don’t overreact,” Leo Grochowski, chief investment officer at BNY Wealth Management, told CNN Business. When the stock market began to recover from the sharp March losses, investors who panicked and pulled out their money lost their rally.
The length and strength of the stock market rally has been one of the most unexpected parts of the year for investors. “People will look back this year and wonder how such market records could have been achieved amid unprecedented economic difficulties,” said JJ Kinahan, chief strategist at TD Ameritrade. Lesson: “Wall Street just doesn’t reflect the main street,” Kinahan said. “But the other part is that there is no main street stock market here.”
Indeed, companies that ended up gaining market share during the pandemic, such as Amazon (AMZN) and Walmart (WMT), were already huge enterprises before Covid-19. Meanwhile, small businesses and family stores have been and remain in a completely different situation.
The US economy is still in dire straits, with millions of unemployed and many businesses struggling. With a new law to stimulate economic growth passed last Sunday and an increase in government aid is expected in the new year, there is plenty of reason to be optimistic about 2021. President-elect Joe Biden’s administration plans to keep the economy back on track, which will help markets next year, even if the hype around them may subside, Kinahan said.