By Matthew Gaude & Shawn McGuire
The bear market ended one year ago this week, finishing one of the fastest and most vicious bear markets of all-time—one that led to a drawdown of 34% in a mere 16 days. Things have come full circle now, as stocks have staged a furious rally, with new highs happening across the globe as the economy recovers at a record pace. We take a look back at what happened last March, while also examining how previous bull markets did during the second year of their existence.
So after such a wild year since the market peaked on this day in 2020, what have we learned?
- Markets are forward looking. We wrote an article in May 2020 titled “What is the #1 Question We Are Being Asked Right Now and Biggest Concern Among Investors” (You can read it here). We discussed that the stock market and economy are two different indicators. You have to separate the two because the stock market is a leading indicator of the economy. That’s why the stock market was going higher while COVD-19 cases and deaths continued to increase. 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.
- 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 chart below, conventional early-cycle leadership from financials and energy stocks has emerged over the past three months:
We have taken a barbell approach to our client’s portfolios meaning, we still have our core investments in Large Cap Growth, Small Cap Growth, Mid Cap Growth and technology, however we have also included investments that should continue to perform well as the economy reopens such as travel and leisure, basic materials companies, Industrial companies as well as energy companies.
- Remember your timeline and separate your ‘feelings’ from investing. 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, that is not how investing works. 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 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.
A Look Back
Although we aren’t sure we want to, let’s take a look back at the bear market and try to put in perspective just how historic and devastating it was for investors, while also pointing out some incredible positives. Here are five amazing stats to summarize the bear market and bounce back:
- Fastest bear market ever. Although it was only a one-month-long bear market, the S&P 500 Index fell 33.9% from the February 19, 2020 peak until the March 23, 2020 low. Along the way, it set the record for the fastest 20% bear market ever (only 16 days, topping the previous record from 1929). (1)
- March 16, 2020. This day will go down in history as one of the worst days ever for stocks. The Dow Jones Industrial Average fell 12.9%, which was the fourth-worst day in the nearly 125-year history of the Dow. Only the crash of 1929, crash of 1987, and the day that trading started (after being halted for months) during World War I were worse than March 16, 2020. (2)
- The most volatile month ever. Huge swings (both up and down) were quite common in March 2020. In fact, looking at the Dow, the average daily move (up or down) during March 2020 was an astounding 5.3% per day. The previous record was 3.9% during November 1929, again showing just how March 2020 was like nothing we’ve ever seen before. (3)
- The bounce back was even more impressive. After falling nearly 34%, it took only five months for the S&P 500 to recover its losses, the fastest bounce back ever for a 30% loss or greater. To put it in perspective, the S&P 500 also lost 34% in 1987, but that recovery took 20 months to get back to new highs. (4)
- From red to green. At the lows in 2020, the S&P 500 was down 30.7% for the year, but when all was said and done it closed up 16.3%. This was the first year in history stocks were down 30% at one point during the year and finished the year in the green. (5)
Now What? The Bull Market Continues
Incredibly, the S&P 500 has increased more than 74.9% since the lows a year ago (as of March 19, 2021), making it the best start to a bull market ever. After such a strong first year, where might this bull market go in its second year?
The previous six bull markets since World War II saw gains during their second year. The average bull market was up 43% one year in and up to 61% two years off the lows. It is worth noting that the current bull market us up close to 75%, making it the strongest start to a new bull market ever, besting the start to the 2009 bull market. But be aware, that bull was up 68% one year off the lows, but up 94% two years off the lows. In other words, the strong gains continued.
The chart below shows what happened during the first year and second year of bull markets that followed 30% or larger bear markets going back to World War II. Here are three takeaways to remember:
- Since World War II, there have been six other bear-market declines of at least 30%, and in every single case the S&P 500 was up firmly the first year of a new bull market—with an average return of more than 40%. The good news is the gains continued in year two, as stocks were also up the second year of a new bull market every single time—up a solid 16.9% on average. Only once (after the 1987 crash) did stocks gain more during year two than year one. (1)
- The previous best start to a bull market ever was the 2009 bull market, which was up 68.6% after one year. Even after those historic one-year gains, the S&P 500 managed to gain a respectable 15.9% during the second year. It wasn’t an easy ride, however, as there was a 17.1% correction during the second year. (2)
- Pullbacks tend to happen during the second year of a new bull market, with an average year two pullback of 10.2%. Considering the current bull market reflected the best start to a bull market ever, this could open the door for an above-average pullback during year two. (3)
Stock Market Outlook
In the meantime, we maintain our next upside target as being the 4300-4400SPX region. We still think it will take several more weeks until the market is ready to head to our target in earnest. In fact, there may still be one more corrective pullback that is going to be seen in the coming weeks. We think this will be our last chance to add stocks, as the market seems to be setting up for a melt-up phase for April, and we think we will move quickly towards our next higher targets.
Lastly, despite all the articles to the contrary, this is still a bull market, and it has likely much higher levels to strike in the coming several years. Pullbacks are buying opportunities, and should be viewed as such.
As always, feel free to contact us or use this link to schedule a phone call or web meeting.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insights and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
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