The stock market recovery reminds us why we continue to stay the course

In February 2020, the stock market as measured by the S&P 500* entered a free fall that lasted for about a month — ending down about 32%. The market eventually recovered and today is up more than 80% since that bottom. It’s a reminder of the importance of sticking to your investment plan. Let’s consider why this is the case.

You did the right thing in 2020 by sticking to your investment plan.

Investing over the past year

As the pandemic began, several things happened that helped the stock market to recover:

  • The Federal Reserve and Congress provided support for businesses and individuals, and the market recovered by August.
  • The development of coronavirus vaccines helped push stock prices upward.
  • A growing legion of first-time investors with stimulus money and stock trading apps on their phones has also helped to boost stocks.

The result? The S&P 500 has surged since its February 2020 bottom.

“This run looks to be one of, if not the, best 365-day stretches for the S&P 500 since before World War II,” said the Associated Press article, Overstimulated? Stocks soar 75% in historic 12-month run.

We haven’t seen a better year since 1936, the last time the S&P 500 rose as much over a 12-month stretch based on month-end figures, the AP says.

I am not surprised.

“The market is just like a healthy person, who can become sick, feel terrible for a period of time, then slowly recover and get back to normal,” I wrote last March in the article, “Be balanced and give the stock market time to recover.”

I also said: “Eventually, it will be back to normal.”

What we have all learned is that staying the course — that is, sticking to our financial plan — is important for our long-term financial welfare.

The bull markets

You may not realize it, but there are two bull markets underway. The stock rally beginning in March 2020 has run through two distinct stages.

  • Big Tech stocks and winners of the stay-at-home economy initially pulled the market up from its February 2020 plunge. Amazon benefited as people did more shopping online. Sales of MacBooks and iPads grew as more people worked from home, boosting Apple’s stock price. Zoom Video Communications’ stock surged for the same reason.
  • Excitement for a re-opening economy also contributed to the market’s recovery. As coronavirus vaccines roll out and Washington delivers more financial aid, banks, energy producers and other companies benefiting from the recovery boosting the broader stock market.

The two bull markets point is important to understand as I believe that many investors are unaware of the market’s shift to value, which is a good thing.

I would almost go so far as to say that there are three bull markets underway. The “third” bull market is coming from people new to stock investing.

“Stuck at home with little to do, people looked for ways to use some dollars that might have otherwise been spent on a movie, restaurant meal or vacation,” the AP article said. “Many turned to the stock market via their phones, as trading apps made it easy to buy and sell shares with a few taps, commission free.”

Some broker-dealers have reported that investors under the age of 40 accounted for 35% of trading in February, nearly double the rate of two years earlier.

This is good news. A new generation of investors is helping to push stocks up broadly, and that serves as a kind of buoy to the market.

What am I paying attention to?

  • Volatility: As the economy grows and returns to pre-pandemic levels, I’m beginning to see some inflationary pressures come in to play. This will inevitably lead to some market gyrations and possible corrections that will require an ongoing conversation. You did the right thing in 2020 by staying the course with your investments, and you’ll need to exercise that same patience and focus going forward.
  • Global recovery: The rally in stocks has been global over the last year. Stocks from China, South Korea and other emerging markets as a group are up almost the exact same percentage as the S&P 500 since March 23, 2020. Japan’s Nikkei 225 index is also up a similar amount. The MSCI Euro Index is up too, although slightly lagging. I’ll keep my eye on those global markets going forward.
  • Asset allocations: I encourage my clients to have asset allocations that match their time frames and goals.

“Stock market declines are OK, even expected, what we strive to avoid is pulling out large chunks of money from stock funds WHILE the market is declining,” I wrote in March 2020 in “Coronavirus: What to do about stock volatility.” “That’s where asset diversification comes in, providing less volatile assets (like bonds) to satisfy income needs or to stabilize a portfolio.”

So, talk to your financial planner about possibly rebalancing your portfolio. But, stay the course.

*The S&P 500 (Standard & Poor’s 500) is an unmanaged group of securities considered to be representative of the stock market in general. The index cannot be purchased directly by investors. Past performance is no guarantee of future results.