Just One Year Ago

March 25, 2021
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February 19th, 2020 marked a new high for the S&P 500 Index. The U.S. stock market was chugging along nicely, returning just over 5% for the year and the NASDAQ was up just shy of 10%.

If we fast forward to March 4th, 2020 the S&P 500 was down -7.5% as the virus started to turn from an epidemic to a pandemic. With news of shutdowns, quarantines, school closings, and business disruptions forming, one of the most volatile stretches in stock market history took place.

These were the gut wrenching daily returns for the S&P 500 that followed:

 

Source: Ycharts

In a short span of time, there were eight days with losses greater than 3%, including four daily drops of 5% or worse; however, some of the worst days were accompanied with some of the best. There were seven daily gains of 3% or more, including 5 daily gains in excess of 6%.

Going back to the start of 1950s, March 16th, March 12th, and March 9th during 2020 all ranked within the top 10 worst daily returns for the S&P 500. The chart of the U.S. market looked like this at the lows on March 23.

If one were to have the perfect foresight to buy at the close on March 23, 2020, one would have been up 78% on a total return basis (reinvesting dividends). 78% in a single year! This doesn’t happen often. According to Nick Maggiulli’s latest blog post1, if you look at the distribution of 1-year returns for the Dow Jones Index since 1915, you will see just how rare the past year has been.

In fact, since 1915 there have only been two periods that had higher returns over the prior year: July 1933 and March 1934. These two periods coincided with the market recovery during The Great Depression.

As one looks at the last 12 months of market performance, the pace and depth of the market decline are clear. What is not clear at first glance is the recovery of some of the hardest hit sectors and companies.

For quite some time, the market leaders tended to be those that would benefit from a post-COVID world, such as companies with continued growth prospects (technology, media, and online retail). Others with dim prospects, such as small business, financials, and energy, faced a slower recovery as the market struggled to value the future prospects of these businesses. Yet, yesterday’s losers have started to turn into tomorrow’s champions.

One of the big takeaways from 2020 is that market sentiment can turn on a dime. Risk is always present, even if we don’t always feel that it is there. As we navigate the rest of 2021, a new set of risks appear: the vaccine rollout, virus variants, stimulus from monetary and fiscal policies and their eventual impact on future generations, and potential rising and sustained inflation.

The hardest part of investing is guarding against our fears of these risks. Seeking to avoid one particular risk can inadvertently introduce risk we never intended to happen in the first place. Sticking with an allocation one can sleep with at night despite seen and unforeseen risks is the key to successfully investing and staying on track to achieve one’s goals.

1 ofdollarsanddata.com; “Started From the Bottom” by Nick Maggiulli

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