Ally graphic shows article title, “5 Market Lessons We Learned in 2020” with faded stock charts in the background and “Weekly Viewpoint” in the top left corner.

2020 has been a year we will never forget, and tough times can teach you a lot.

One thing we learned was how to be better investors.

This week, we’ll reflect on our biggest market lessons from these crazy times.

1. Don’t fight the Fed

Our biggest market lesson from 2020? Don’t fight the Fed.

Policymakers effectively saved the economy from a much deeper recession by taking swift action early. The goal was to help stabilize what was becoming a very unstable market. On March 15, the Federal Reserve cut interest rates to zero and committed to buying billions in bonds and other asset classes in order to inject more cash into the financial system.

Needless to say, the S&P 500 turned around at the end of March and is near all-time highs as we exit 2020.

The action by the Fed helped make sure companies had access to capital they needed to survive the downturn. Corporate debt issuance rose 50% this year, and the action also prevented credit from being shut down to consumers. Mortgage refinancing spiked, and home sales rose to new highs. Another side effect was that initial public offering (IPO) activity has more than doubled this year from 2019.

It was easy to doubt the market’s resiliency when it bottomed back in March. But many underestimated the policy’s potency to counteract such a historical economic shock.

2. Don’t underestimate the consumer

Despite the economy falling into the deepest recession on record in 2020, the consumer has been quite resilient.

Consumer spending rebounded quickly between April and October and retail sales surpassed pre-pandemic levels in June. The savings rate rose into the double digits and deposits at banks surged.

The chart shows the rise in bank deposits from January 2015 to November 2020, reflecting growth of cash and demand deposits to $6 trillion and growth of savings, CDs and money markets to $13 trillion in 2020.

Congress was proactive in providing economic support to small businesses and consumers in the early stages of the pandemic through the CARES Act, which included stimulus checks for households.

As a result, consumers’ incomes jumped the most on record in the second quarter, setting the economy up for a big rebound in the third quarter. The rise in deposits also added a cushion that represents about 20% of gross domestic product.

To be fair, it may be too soon to declare victory for the consumer just yet, even though the stock market seemingly has already done so. But the consumer could’ve been in a much worse situation had the Fed and lawmakers not acted so quickly.

3. Politics create volatility (and opportunity)

If 2020’s pandemic chaos wasn’t enough, we also witnessed a historic Election Day. And from that, we learned a valuable lesson: volatility and opportunity can go hand-in-hand.

Investors were understandably nervous leading up to the election. The S&P 500 dropped 6% in the week before Election Day. But patient investors were rewarded in November with one of stocks’ best months in history.

The chart shows the S&P 500 monthly returns for 2020. Despite a 6% dip the week before election day, the index delivered 10.8% returns in November.

Looking forward, a Biden administration could focus more on fiscal stimulus and economic rebuilding, two initiatives that could lift the market in the new year.

To be fair, the political drama isn’t over yet. There are two Senate runoff races scheduled in January, which could determine whether we’ll have a split Congress (a setup that stocks have liked in the past). Congress is also in the middle of budget negotiations, and discussions around more fiscal aid. Plus, Biden’s administration is expected to eventually consider increasing taxes and regulation, which could roil markets.

Needless to say, more political volatility could be ahead. But as we’ve learned, that could also mean more opportunity. After all, you aren’t invested for a four-year presidential term, you are invested to meet your financial goals.

4. The stock market isn’t a one-trick pony

If you’re looking for opportunities in the market, it’s important to stay in tune with the environment. Even the most convincing market narratives don’t last forever.

Tech stocks led the market higher at first, a trend that made sense as quarantine forced much of our daily lives online. The FAANG companies rose 31% in the first half of the year, and “stay-at-home” stocks like Zoom and Peloton more than doubled.

Then, the market mood shifted, and tech fell 13% in September. The sector has since stabilized, but value stocks are coming back as investors prepare their portfolios for the end of the pandemic. Industrials, materials and financials led stocks higher in the second half of the year. Even some retailers, small caps, and biotech stocks showed outperformance versus tech over the same period.

Few people (if any) predicted that homebuilder stocks would have their best quarter in 19 years during one of the biggest economic shocks in history.

Even though tech accounts for more than 25% of the S&P 500, the second-half strength of other sectors and industries show why having a diversified portfolio is important. In general, it is more bullish for the market when a wider swath of the market is performing well.

5. Having a long-term mindset can pay off

It’s easy to say you’re in it for the long run when markets are calm. It’s much harder to stick to your plan when markets are swinging.

That’s a lesson we all learned in the spring. The S&P 500’s 34% drop earlier this year was one of its biggest in history, and its daily swings were even more eye-opening. At one point in March, the index moved more than 3% for eight straight days. For context, 3% moves in the S&P 500 happened in 2% of days from 1990 to 2019.

Chart shows the S&P 500 Index and highlights when there were daily moves of 3% or more from 2010 to 2020. From 2010 to 2019, there were 58 moves of 3% or more. So far in 2020, there have been 45 moves of 3% or more.

At the time, it felt like the world was ending with a surging pandemic and a wave of economic shutdowns. But nine months later, stocks are about 60% higher and staring down record highs.

This year’s quick and violent bear market reminded us why being reactionary isn’t a good investing strategy. Riding out a volatile market is tough. After all, the S&P 500 has taken an average of 28 months to recover from the last 10 bear markets. But history shows it can eventually pay off if you’re willing to wait.

Bonus lesson: Don’t take life for granted

Life looked a lot different this year and reflecting on 2020 made us count our blessings. We’re thankful for the technology and innovation we’ve seen over the past several months, but we can’t wait to hug our family and friends again. The past year has made us appreciate the simple things in life much more.

We’re also grateful for the courage we’ve seen from healthcare workers, essential workers, teachers and caregivers during this awful pandemic. After 2020, we’ll never take our health and well-being for granted again.

Here’s to a better 2021.

Callie Cox, Senior Investment Strategist, contributed to this article.

Speech bubble icon next to text "Expert Take"

Headshot of Lindsey BellLindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo-advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.

Lindsey holds a passion for teaching individuals how to become successful long-term investors. She is a contributor at CNBC, and frequently shares her insights with various publications including the Wall Street Journal, Barron’s, MarketWatch, BusinessInsider, etc. She also serves on the board of Better Investing, a non-profit organization focused on investment education.

Headshot of Callie CoxCallie Cox is Ally Invest’s Senior Investment Strategist. In her role, she helps educate Ally Invest customers about the financial markets through engaging content and strategic initiatives. Callie has worked in financial research for her entire career, with stints at LPL Research, TABB Group and Bloomberg. Her work has been featured in Bloomberg, the Financial Times, Yahoo Finance, and Barron’s (among other publications). You can also find her on Twitter at @callieabost.

The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.