Entering 2020 the stock market (S&P 500) was setting new all-time high’s through the middle of February. We had recovered nicely in 2019 from an unforeseen downturn caused by policy decisions of the Federal Reserve at the end of 2018, and the market seemed poised to continue its run in 2020. We then were hit with another unforeseen event this spring, with COVID-19 nearly bringing global commerce to a halt as mass global quarantine occurred almost simultaneously to stop the spread of a new, novel coronavirus. The market responded by having the fastest major bear market in history, as the S&P 500 fell nearly 34% in 33 days from February 19th to March 23rd.
At this point there were still so many uncertainties surrounding the global pandemic, with the consensus being that we would not be able to return to any state of normalcy until a vaccine was developed, which would take at least a year to bring to mass production at the very earliest. However, following the March 23rd market lows, we began a brand-new bull market, despite the many unknowns of COVID-19. The market continued higher, posting its best 50-day gain of all time, and its second best 100-day gain since 1933. We have since been setting fresh all-time high’s once again, despite still may uncertainties and no vaccine for COVID-19.
If you had told me at the beginning of the year the market would be up low double digits by the start of September, I would have guessed that it would have been a typical year without too many major surprises. As we all know having experienced this ongoing pandemic, it has been anything but typical. I believe the first lesson that should be taken from this year is that the market can never be timed. Trying to sell stocks into the abrupt selloff from February to March has already proven to be a poor decision and trying to find a time to buy back in has likely proven ineffective as the market moved back up so quickly. It is improbable anyone could have timed selling prior to the downturn, or buying right at the beginning of the recovery, much less both.
The second lesson we can learn from 2020 is that market events like this downturn are actually fairly common, however the causes of these events often differ greatly. A bear market is defined by a decline of prices greater than 20% from highs. Since 1926 there have been 16 bear markets, meaning on average we have one approximately every six years. These events are normal, and should be expected by investors, while understanding the cause of each event is likely to be very different. Historically speaking this downturn of 34% is less than the average bear market decline of 39%. While in the middle of any major downturn it can be easy to believe that “this time is different” and panic out of equities, although history has proven time and again that this time really is not different, and we will recover and come out of the event stronger than before. Panic is never a strategy. Investors should learn to accept that events like this will happen time and again in the future and should be welcomed by long-term investors as great buying opportunities.
This leads to our third, and possibly most important lesson: you can never know how or when the market crisis will end, but you can be sure that it will end. Although the COVID-19 pandemic has continued with no clear end in sight, the forward-looking market has effectively ended market crisis that took place in February and March. Each market crisis has many variabilities, and is very unpredictable, however the one certainty is that every market crisis will eventually end. The average bear market lasts 22 months. The fact that every market crisis will end describes the price of being an equity investor, we must endure temporary downs for permanent ups. Nobody can reliably predict which direction the next 10% or 20% market move will be, but I with certainty know which direction the next 100% move will be, and that will always be higher.
About the author: Nathan V. Bremer, AAMS® is a financial advisor, and Founder of Eighth Wonder Investments, a financial planning firm focused on helping working age individuals achieve their financial goals.