Friday, February 19, 2021
Today marks one year since the market began to price in the effects that COVID-19 would have on the world. The old market adage “stairs up, elevator down” certainly rang true over the coming weeks, as the S&P 500 recorded the fastest bear market (closing 20% below a previous all-time high) in history, accomplishing that feat in a mere 16 days.
The stock market is a peculiar mechanism however, and despite the turmoil the world has experienced since the outbreak of the pandemic, the S&P 500 marched forward to set new all-time highs less than 6 months later on August 18 and hasn’t looked back. So after such a wild year since the market peaked on this day in 2020, what have we learned?
1. Markets are forward looking. While it’s difficult to pin down a date when we can expect our lives to completely return to normal, the stock market is already pricing in the normalization of daily life, even if that remains uncertain. Economic conditions around the world have been improving relative to how they were at the beginning of the pandemic. While pockets of weakness remain, the market is more concerned with where the economic conditions will be, not where they are currently.
2. Sector performance is dynamic. Investing in “stay at home” themed growth and technology stocks whose earnings were viewed to be relatively well insulated by the effects of the pandemic and subsequent lockdowns provided both downside protection during the March volatility as well as outperformance after the market bottomed. However, as shown in the LPL Chart of the Day, conventional early-cycle leadership from financials and energy stocks has emerged over the past three months:
3. Remember your timeline. Everyone would love to be able to pull their money at the exact top, avoid all major market corrections and reinvest at the bottom, but unfortunately, there is no holy grail timing mechanism and market volatility is the cost of admission for stock investing. “It’s our jobs as investors to focus on our long-term goals,” noted LPL Financial Chief Market Strategist Ryan Detrick. “Drawdowns and bear markets are part of the path to get there, and limiting the latest shiny object from affecting our decisions is key to any investment strategy.” If an investor pulled their money from the market during last year’s volatility, there have been a plethora of reasons to be hesitant to reinvest it, and the subsequent bounce from the lows happened in a flash, meaning they may have bought back in at a higher price than they originally sold.
Thankfully, bear markets and extreme volatility like we experienced last year are rare, but they provide a unique learning opportunity for investors. No one truly knows what the future holds for the stock market, so making sure we learn from the past is crucial for long-term success as investors. For more on our market and economic views, check out our most recent Global Portfolio Strategy publication.