Happy birthday to the pandemic bull market
On March 23, 2020, stocks plummeted to the pandemic bear market bottom. The month of March was agonizing, as investors were forced to dust off the term “trading halt” as they endured a gut-wrenching selloff. The damage was swift: The records of the previous month vaporized into a bear market (defined as a decline of more than 20% from the previous high).
When the selling finally reached a nadir on March 23, the bear had gobbled up about a quarter of the S&P 500 index’s value and also put an end date on the longest bull market for stocks on record (March 2009 to March 2020).
A year ago, I held the hands of nervous investors, many of whom had barely recovered from the Great Recession of 2008-2009 and its associated bear market. I trotted out my usual investment advice for the whiteknuckle crowd: remind yourself that you are in it for the long term, be thankful that you have a diversified portfolio, and use the selloff to rebalance and check your risk tolerance.
But even I, a survivor of more than 30 years of bear markets, replete with a few crashes, could not have imagined that stocks would be trading more than 50 -75% higher over the course of just one year. The winning cocktail was a massive fiscal effort (emergency government spending), plus similarly massive monetary actions by the Federal Reserve.
Unlike previous bear markets, the institutional traders were the ones who were panicstricken, not the retail investors who stuck to their game plans.
As the bull continues to run, there are a few warning signs that should inform your outlook. The most important of which is to always remember how bad you felt a year ago.
Maybe you want to purchase a meme stock, bitcoin or a nonfungible token (NFT). OK, it’s probably a little less obvious than that — perhaps you are taking a look at your retirement account and feel like you want to bail out of bonds and pour everything into stocks. Before doing so, please, please, please look back at the calendar and remember the fear and anxiety you may have felt and beat back that greedy devil on your shoulder.
Next, if you qualify for a $1,400 rescue payment or any other form of stimulus, be sure that you have satisfied Aunt Jill’s request to fully fund your emergency reserve fund (six to 12 months of your expenses) and also pay down outstanding consumer debt before you invest.
Presuming that you have accomplished both of those tasks, then try to avoid the stock picking trap. Oh sure, maybe you want to take a flyer, but consider this before you do: In 2020, a year when the financial services industry was shrieking that it would be “a stock picker’s year,” 60% of actively managed U.S. large cap funds could not match the return of the S&P 500 index, according to S&P Dow Jones Indices. It must be thrilling to think that there is someone who knows better, but for the 11th straight year, the results are the same.
That means that the advice remains consistent: Stick to low/zero cost index funds for the long term.
Finally, if you are fortunate enough to have participated in the stock market rally of the past year, be careful not to think that every American has also been able to do so. According to the Federal Reserve’s 2019 Survey of Consumer Finances (the most recent triennial survey), a little more than half of U.S. households (52.6%) own stocks. A more recent Gallup poll conducted in March/April 2020 found the level to be 55%.