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This time last year, the World Health Organization recently had declared that the spread of Covid-19 constituted a worldwide pandemic. The U.S. took stringent measures to slow the spread of Covid and “flatten the curve.” Remember that? 

The lockdowns and shelter-in-place orders halted economic activity.

Never before had we dealt with a self-induced recession this bad. Investors, who attempt to price in economic activity over the next six to nine months, had no prior experience to handicap a shutdown and eventual reopening of the economy. It was as if we were driving through a dark and foggy night with no headlights to guide our path. 

Consequently, investor reaction was swift, and we got the first bear stock market since 2009. The market went down -34% in only 33 days. Volatility was intense. In just one day, the Dow Jones Industrial Average lost nearly 3,000 points, or -13% (March 16, 2020 St. Louis Federal Reserve DJIA data).

That day accounted for over 25% of the Dow’s nearly 11,000-point peak-to-trough loss. The major market indexes bottomed on March 23. The bear market lasted barely over a month, if we use the broader-based S&P 500 Index as our yardstick. It was a swift decline, but it was the shortest bear market ever. 

The ensuing rally has been unprecedented. Since bottoming, the S&P 500 Index advanced an astounding +78% through the end of March 2021. The index’s 3,973 close at the end of the first quarter put it within just 2 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 recovery over the first year tops all other prior bull market first years. In second place at +72% is the bull market that began in March 2009. That run lasted into February 2020. 

If we gauge the first year of the 1990s bull market, the S&P 500 had advanced only +33% during its first year. It’s an excellent performance for a period that runs about one year, but it would place the start of the long-running 90s bull market in last place among the six longest periods since WWII.

Where are we headed from here? You’ve heard me say that no one has a crystal ball. No one can accurately and consistently predict what may happen to stocks.

Nevertheless, let’s look at what’s happened in the second year of bull markets that followed bear markets that fell at least -30%.

Since World War II, there have been six other bear-market sell-offs of at least -30%. In each case, the market posted strong returns in the first year, with an average gain of +41%. (Remember, the market was up +78% in the first year after the latest downturn). Gains ran into year two, with an average increase of +17%; however, the average pullback during those six periods: -10%. 

So, let’s not discount the possibility of a bumpy ride this year.

Treasury bond interest rates have jumped as the government has embarked on an expensive $1.9 trillion stimulus plan, and talk of new spending from Washington is gaining momentum. 

Further, bullish enthusiasm can sometimes spark unwanted speculation.

Might the economy overheat and spark an unwanted rise in inflation? Might rising bond yields temper investor sentiment? Up until now, investors have focused on the rollout of the vaccines, reopening of the economy and the benefits these are providing.

Today, momentum favors bullish investors, but valuations seem stretched, at least over the shorter term. When markets are surging, there is a temptation to load up on risk. FOMO (Fear of Missing Out) is a strong force. I just heard this morning that more money has moved into stocks in the last 6 months than in the last 12 years.

 GOALS – PLAN – PORTFOLIO

Of course, we avoid this emotional investment trap by following the three fundamental steps to successful investing: goals – plan – portfolio. With this process we remove the the emotional component when stocks are falling. It also erects a barrier against the impulse to load up on riskier investments when shares are quickly rising. For example, we have had about 15% cash in the FOLIO model portfolio for most of last year. And only recently have we added two new stocks Maxar (MAXR), a space company that makes robots, satellites and collects data for commercial and government uses, and PaySafe (PSFE), an established payments company, who just came back to the public stock market. PSFE has a niche in iGaming and online sports betting and sees Asia and North America as growth markets.

Life changes, and when it does, adjustments to the plan may be appropriate. But ups and downs in stocks are never a reason to make emotion-based decisions in our portfolios.

I trust you’ve found this review to be educational and informative.

Thank you for being our clients. It is a privilege to serve you and your families.

I’m at david@valuealigned.com or 732-800-2375. Feel free to call me direct on my cell phone at 732-284-1267 (or text me too).