A reflection from Jim Kruzan, CFP®, CRPC®
What a roller-coaster ride!
A little over a year ago, the World Health Organization declared the spread of COVID-19 a worldwide pandemic.
As a result, stringent measures were being taken in the U.S. to help slow the spread of COVID and ‘flatten the curve.’ The lockdowns and shelter-in-place orders dealt a body blow to U.S. economic activity. This, in turn, created an economic meltdown the likes we have never seen (at least not in the last 38 years of my career!) – a drop of 8+% in economic activity in a matter of weeks.
Investors, who attempt to price in the change in economic activity over the next six to nine months, had no prior experience handicapping a ‘manmade’ shutdown and eventual reopening of the economy. It wasn’t your typical recession. It was as if we were driving through a dark and foggy night without headlights to guide our path.
Consequently, both investor and market reactions were swift, with the first bear market since 2009 descending upon investors. Volatility was intense. In just one day (March 16, 2020), the Dow Jones Industrial Average lost nearly 3,000 points (12.9%)! That day accounted for over 25% of the Dow’s nearly 11,000 point peak-to-trough loss.
A just as quickly, it was over.
The major market indices bottomed out on March 23 after some very public discussions concerning a substantial rescue package (CARES Act passed March 27, 2020). Using the broader-based S&P 500 Index as our yardstick, the bear market lasted barely over a month. It was a swift decline, but it was the shortest bear market we’ve ever experienced.
The ensuing rally has been nearly unprecedented. Since bottoming, the S&P 500 Index advanced an astounding 77.6% through March 31. Its 3,972.89 close at the end of the first quarter put it within 1.65 points of the prior March 26 closing high. And that is on top of a series of new highs since the beginning of the year. Since the end of the quarter, the S&P 500 has gone on to top 4,000.
Let’s back up and take a broader view.
If we review the six longest bull markets since WWII, the S&P 500’s advance over the first year tops all other prior bull markets. In second place at 72.4% is the bull market that began in March 2009. That run lasted into February 2020.
But as they often say on legal disclosures- past performance doesn’t always guarantee future results.
If we gauge the first of the 1990s bull market, the S&P 500 had advanced 32.8% during the same period. It’s an excellent performance for the period that runs about one year. Still, it would place the start of the long-running 90’s bull market in last place among the six-longest periods since WWII.
Where are we heading from here? You’ve heard me say that no one has a crystal ball (certainly would make my job much easier!). No one can accurately and consistently predict what may happen to stocks.
Nevertheless, let’s look at what happened in the second year of bull markets born out of bear markets that saw the S&P 500 Index fall at least 30%.
Since WWII, there have been six other bear market selloffs of at least 30%. In each case, the market posted strong returns in the first year, with an average gain of 40.6%. Gains ran into year two, with an average increase of 16.9%; however, the average pullback during those six periods: 10.2%.
So, let’s not discount the possibility of a bumpy ride this year.
Treasury bond yields have jumped as the government has embarked on an expensive $1.9 trillion stimulus package. The talk of new spending from Washington is gaining momentum. Further, bullish enthusiasm can sometimes spark unwanted speculation (think SPACs, Gamestop, et al.).
Might the economy overheat and spark an unwanted rise in inflation? Might rising bonds yield temper investor sentiment? Until now, investors have focused on the rollout of the vaccines, the reopening of the economy, and the benefits these are providing. Momentum favors bullish investors, but valuations seem stretched, at least over the short term- now is not the time to be too aggressive.
With all that said, we are positioned to take advantage of continued market performance but maintain ready to de-risk should the need arise. To take a closer look at how the first quarter of 2021 faired, and what we expect going forward this year, watch our most recent Capital Market Review here.
All the best,
