We’ll never forget the spring of 2020. Widespread lockdowns significantly slowed or halted economic activity around the world to prevent the spread of a contagion that (at the time) had no remedy. The global pause in economic activity pushed markets and the economy into a recession at record speed as people balanced dueling threats to their personal and financial health.
The pandemic was what you’d call a “black swan” event, or an unpredictable occurrence that had an immediate, profound impact on the world. Last year was difficult for investors (especially in the fog of uncertainty), but as fears swelled and the market started getting jittery in February 2020, we reminded investors that these periods of uncertainty are when trust in your plan should be greatest:
“Whether it’s a viral outbreak, a military strike or a bursting tech bubble, there are going to be times when markets are overcome with fear and doubt. But those who hold fast while the rest of the world panics … tend to be rewarded.”
We further demonstrated that when the VIX, the stock market’s fear gauge, reaches “panic” levels, 12-month returns from that date were positive 95 percent of the time (246 out of 258 instances). We’ve also seen markets recover following every black swan event in the past 60 years. That sentiment girded our confidence even through the most uncertain days of 2020. During a time of great upheaval, we recommended doing very little apart from routine portfolio rebalancing — or even adding equities if your risk tolerance and time horizon allowed. And, once again, history anticipated the bounce back from 2020’s market lows.
COVID-19 BOUNCE BACK
While COVID-19 was certainly unique, it wasn’t the first black swan event to rattle markets — and it won’t be the last. But the data doesn’t lie: Most investors who stuck to their plan rather than sold on political or pandemic worries in 2020 were rewarded for their patience and discipline. The WHO declared COVID-19 a global health emergency on Jan. 30, 2020. Even with an economic recession in between, the S&P 500 index was 15 percent higher from that point exactly one year later.
COVID-19 (Jan. 30, 2020)
1 Month Later: -9.85%
3 Months Later: -10.85%
6 Months Later: -0.16%
1 Year Later: 15.18%
During an exogenous event or financial crisis, we (collectively) tend to extrapolate current conditions far into the future. It is a well-studied mental shortcut called “recency bias,” which means people tend to give greater importance to the most recent event — hence closing arguments, grand finales, etc. In times of crisis, however, our recency bias causes us to underestimate the resiliency of the economy and society’s ability to adapt in the weeks and months ahead.
In the fog of uncertainty last year, few people would have anticipated the torrid recovery that followed. That a bounce back occurred shouldn’t necessarily be a surprise, however. It’s a dynamic that has played out time and time again in the U.S. stock market, which is why it’s so important to rely on your financial plan, rather than emotion, in times of market duress.
PAST MARKET CRASHES
We tracked the gains or losses on the S&P 500 index over various time frames following major events in U.S. history. You can see a clear pattern emerge (all returns are cumulative total returns).
Kennedy Assassination (Nov. 22, 1963)
Day of Event: -2.81%
3 Months Later: 12.53%
3 Years Later: 25.85%
10 Years Later: 97.86%
Black Monday (Oct. 19, 1987)
Day of Event: -20.47%
3 Months Later: 12.01%
3 Years Later: 54.74%
10 Years Later: 464.09%
September 11 Terrorist Attack (Sept. 11, 2001)
Day of Event: -4.92%
3 Months Later: 4.42%
3 Years Later: 8.20%
10 Years Later: 28.26%
Lehman Bros. Bankruptcy (Sept. 15, 2008)
Day of Event: -4.71%
3 Months Later: -26.65%
3 Years Later: 8.39%
10 Years Later: 201.69%
While these data make a clear point, they don’t tell the entire story. While the large-cap companies in the S&P 500 form a decently representative picture of the U.S. economy and its subsectors, it isn’t the entire investable universe. We recommend investing in a broadly diversified basket of U.S. and international stocks. Take, for example, the years following the attacks on 9/11. The S&P 500 was up roughly 28 percent 10 years following the event. While some may say those post-9/11 returns are rather modest, it is important to note that other sectors here and abroad did well. Small-cap stocks rose 95 percent, commodities climbed 93 percent, mid-cap stocks advanced 101 percent, and international/emerging markets rose 350 percent.
That leads into a final, critical point: The market is broad, and recessions have consequences. While markets have recovered time and again following adverse events, the sectors or industries that lead the next recovery often change. Society advances. Policymakers shift. Supply chains adapt, and technology evolves. New ways of thinking and behaving are cemented, and businesses that adapt and lead fuel the next expansion.
It’s hard to predict how the economy will evolve or foresee an event that could catalyze rapid change, such as COVID-19. Investing in a broadly diversified portfolio that’s exposed to a range of asset classes around the world is one of the best ways to hedge against an uncertain future.
Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.
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