There’s an old saying about roller coasters: They go up, they go down, you end up where you started, and it cost you to ride. The markets have been on a similar track over the past year, enduring a historic drop and a climb to get back to where they started before the pandemic.
But make no mistake, investing is a journey, not a circular trip. A well-built portfolio, disciplined approach and long-term perspective equipped investors to navigate and even benefit from – not pay the cost of – the ride. There’s plenty of track ahead, though.
Where does the market go from here?
The steep drop is followed by a long climb.
Last year’s recession reset the economic clock. We think we’re in the early stages of an extended expansion that will speed up in the second half of 2021 and then climb at a moderate pace in the coming years.
A key driver of this is the health of the labor market, since consumer spending comprises roughly 70% of U.S. GDP. We think this will be a temporary stall in the recovery, but we anticipate the economy to gain momentum in the second half of this year.
The unemployment rate above 6% is still punitively high – but well below the nearly 15% rate of a year ago. Historically, after joblessness peaked amid a recession, the unemployment rate fell by an average of 0.9% by the end of the following year. We believe the unemployment rate could be in the mid- to upper 5% range by year-end. This is still well above the pre-pandemic level but on an improving path.
The 2020 recession was the shortest but most severe on record. While downturns are painful, it’s the ensuing recoveries that can make it worth staying in your seat. Over the last 50 years, the average market return in the calendar year after a recession was 8.1%. Equities rose sharply in the second half of 2020, but we think a sustained expansion will set a favorable foundation for markets in the coming years.
Source: FactSet, S&P 500 Index. Past performance is not a guarantee of future results.
This chart shows line graphs of the last five bear markets and their recoveries. Dates covered are 1980 to 1987, 1987 to 2000, 2000 to 2007, 2007 to 2020, and 2020 to the present. The line graph for the most recent recession shows it was the shortest but the most severe on record.
Returning to level doesn’t mean the end of the line.
The stock market fell 34% in just over 20 trading days last year. The initial recovery was also swift, with stocks having recouped their losses on the way to new record highs this year. This marked the fastest 30%-plus market drop and recovery on record.
The good news is this recovery doesn’t mark an exhaustion point for stocks. Looking at bear markets since World War II, once the market returned to the previous high, it gained an average of 14.3% over the following 12 months.
2020 was the fifth instance since 1950 in which the stock market declined by more than 30% within a calendar year. In these past instances, the market gained an average of 27.2% in the following calendar year.
These examples support a positive outlook but aren’t a predictor of future gains. In fact, while the fundamental economic and policy backdrop is favorable, we believe market returns will be more moderate this year. The recent sharp rally has already priced in a portion of the economic recovery ahead, a reminder of the market’s forward-looking nature.
Prepare for a bumpier ride ahead.
While we think 2021 will end up being a positive year for the markets, we expect the path ahead to be bumpier than the one we’ve traveled since last April. We anticipate spurts of disappointment amid the recovery process and periodic policy anxieties to produce more frequent market swings.
Some investors believe pullbacks signal a recovery’s demise. But bouts of volatility in the first two years of bull markets are quite normal. The market rose 70% in the 10 months following last March’s lows, similar to the beginning of the previous bull market that started in 2009, which saw the stock market rise 69% in the first 10 months.
It can be easy to focus on one portion of the track, but we believe investors should take a broader perspective. Despite the sizable ups and downs along the way, the stock market gained 31% in 2019 and 18% in 2020. This is the 16th time since 1950 in which the market has gained more than 15% in back-to-back years. The average return in the year following was 9.2%.
This highlights the importance of:
- Staying invested amid the twists and turns
- Appropriately calibrating your expectations for positive but more moderate returns ahead
- Ensuring your investment decisions remain aligned to your goals
Your financial advisor is along with you for the ride, identifying strategies and opportunities to help you remain on track toward your long-term financial goals.
Craig Fehr is a principal and the leader of investment strategy for Edward Jones. As investment strategist, Craig is responsible for analyzing and interpreting economic trends and market conditions, along with constructing investment strategies and recommendations to help investors build and maintain portfolios designed to help reach their long-term financial goals.
He has been featured in Barron’s, The Wall Street Journal, the Financial Times, SmartMoney magazine, the Globe & Mail, the Financial Post, Yahoo! Finance, Bloomberg News, Reuters, CNBC and Investment Executive TV.
Craig holds a degree in finance from Truman State University, an MBA with an emphasis in economics from Saint Louis University and a graduate certificate in economics from Harvard.
Past performance is not a guarantee of future results.