The Year Investors Endured

12 months ago today, the S&P 500 hit its final all-time high of a bull market that began way, way back in March 2009. What markets endured over the next five weeks was awful, as was the pandemic’s toll on humanity—which we are still living through even now. Yet despite all the terrible things that have happened, the S&P 500 is now up 17.7% since that prior peak, illustrating the timeless value of discipline and a cool head.^[i]

The list of struggles and tragedy endured worldwide over the past year is overwhelming, to say the least. Beyond the pandemic and its horrible death toll, we had wildfires, tornadoes, floods and deep freezes. Locusts wiping out harvests throughout Africa. Deep political divisiveness. Societal unrest. These events have touched many lives, and as a society, we have learned many lessons from them. But for investors, there is one big takeaway: Markets rose as the vast majority of these troubles unfolded. Even the pandemic’s worst effects, from the mounting death toll to the deep economic contraction resulting from lockdowns, occurred after stocks bottomed in March. That sharp downturn was stocks’ way of anticipating the economic trouble to come. Keeping a forward-looking perspective—and staying disciplined—was key to capturing the recovery and reaping the cumulative gains since 2020 began.

Saying that in hindsight is one thing. Doing it at the time, in the heat of panic, was likely exceedingly difficult for the vast majority of readers. Between February 19 and March 23, the S&P 500 plunged -33.8%.^[ii] Adding to the panic was the handful of sheer vertical daily drops—like March 9’s -7.6%, March 12’s -9.9% and March 16’s -12.0%.^[iii] Like pretty much any bear market and early recovery, big swings clustered together, adding to the sense of panic. While this bear market’s suddenness was unusual, volatility coming in clumps is normal in a bear market year, as the very long table at the end of this piece depicting daily moves of greater than 1%, 2% or 3% (up or down) shows. But that heightened volatility cuts both ways, as bear market years also feature more big up days than pure bull market years—particularly in calendar years when a new bull market began midstream. Many of those big up days cluster around the bear market’s lowpoint, making it crucial to be invested when a bull market begins. This is why selling after a big decline is among the most devastating errors a long-term growth investor can make.

That was among the chief risks investors faced last year, in our view. When stocks plunged in the winter, for many folks, the initial emotional response was shellshock. Most investors were frozen. That kept them invested during the downturn, likely causing no small distress to many. But it also meant they were invested when the recovery began, positioning themselves to ride the rebound. However, realizing that potential required staying invested as historically awful economic data came out in the spring and summer. While the death toll mounted. As unrest gripped the nation, wildfires choked the West Coast and Colorado—and ever so much more, all the way through the chaotic conclusion to a tense US election capped off by January 6’s Capitol riot.

If you managed to stay cool and disciplined throughout that, you deserve a moment to congratulate yourself. If you didn’t, then don’t get discouraged. There will be more bear markets, and what matters is that you don’t erase bad decisions from your memory. Rather, acknowledge and learn from them. Take the lessons you learned and put them to use next time—and the times that will follow. If your big lesson was that stocks are forward-looking, and they can recover even as bad data roll in and unemployment climbs, take that with you. If your big lesson was that widely discussed fears don’t hurt markets as hard as everyone warns they will, then take that with you. For if we know one thing about the world, it is that bad times come along with the good, and 2020 won’t be the last test of investors’ mettle.

Annex: Historical Daily S&P 500 Volatility in Bull and Bear Market Years by Magnitude

Source: Global Financial Data, Inc., as of 2/17/2021. Daily S&P 500 price returns, 1/1/1928 – 12/31/2020. Shading indicates the calendar year contains a bear market.