The Covid Economy, A Year Later
This time last year, the World Health Organization recently had declared that the spread of Covid-19 constituted a [[https://www.who.int/director-general/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020 worldwide pandemic]].
Stringent measures in the U.S. were being taken to slow the spread of Covid and “flatten the curve.” The lockdowns and shelter-in-place orders dealt a body blow to U.S. economic activity.
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 if we were driving through a dark and foggy night with no headlights to guide our path.
Consequently, investor reaction was swift, and the first bear market since 2009 descended upon investors. Volatility was intense. In just one day, the Dow Jones Industrial Average lost nearly 3,000 points, or 12.9% (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 (St. Louis Federal Reserve). 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 [[https://www.reuters.com/article/us-usa-stocks-s-p500-bear-graphic/say-goodbye-to-the-shortest-bear-market-in-sp-500-history-idUSKCN25E2R9 shortest bear market we’ve ever experienced]].
The ensuing rally has been nearly unprecedented. Since bottoming, the S&P 500 Index advanced an astounding 77.6% through March 31. It’s 3,972.89 close at the end of the first quarter put it within 1.65 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.
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.
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 40.6%. Gains ran into year two, with an average increase of 16.9%; however, the average pullback during those six periods: 10.2%.
So, let’s not discount the possibility of a bumpy ride this year.
Treasury bond yields have jumped as the government has embarked on an expensive $1.9 trillion stimulus package, 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.
Just as the investment plan takes the emotional component out of the investing decision when stocks are falling, it also erects a barrier against the impulse to load up on riskier investments when shares are quickly rising.
Life changes, and when it does, adjustments may be appropriate. Ups and downs in stocks are rarely a reason to make emotion-based decisions in our portfolios.
Please see below the latest quarterly numbers and charts on The Impact of Diversification and First Quarter World Stock Market Performance.
Table 1: Key Index Returns
Dow Jones Industrial Average
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA*
MSCI Emerging Markets*
Bloomberg Barclays US Agg Total Return Value Unhedged
Source: MSCI.com, Bloomberg, MarketWatch
MTD: returns: Feb 26, 2021-Mar 31, 2021
YTD returns: Dec 31, 2020-Mar 31, 2021
*in US dollars