Given the US market’s recovery since the COVID pull back last year, we are having many conversations around whether to stay in the market and/or continue current DCA or other buying strategies. The data analyzed by Ben Carlson below indicates sticking with the current program when investing for the long term is the most prudent course. The article is concise, well written and very worth the 5 minute read. If you have any questions regarding your situation at this historic time, please give us a call.
What Happens After the Stock Market is Up Big?
It seems like there is always a good reason to worry about the stock market. When stocks are falling it feels like they can always fall further. And when stocks rise it feels like the peak is always right around the corner.
But what about when stocks rise by A LOT? That’s the situation we’re looking at right now with a massive rise from the bottom last March.
In a recent piece at Fortune I looked at the history of stock market moves after such a huge gain.
*******
The S&P 500 fell nearly 34% in just twenty-two trading sessions during the onset of the pandemic last spring. Then the market bottomed following a -2.9% down day on March 23, 2020. The following Monday, the market was up more than 9% and it hasn’t looked back ever since.
The one year return from that bottom was an astonishing 75% and that doesn’t include dividends. A gain of this magnitude in such a short period of time is a rarity in the stock market. In fact, this was the largest 12 month gain ever since 1950.
There were larger one year gains during the Great Depression but the losses were so much bigger back then it’s hard to make an apples-to-apples comparison with that time.
The question for many investors is this: What comes next?
It’s understandable many investors are worried these gains have come too far, too fast. There is no such thing as “easy” when it comes to investing in the markets because the future is always uncertain, but the past year or so has been mighty kind to investors in risk assets. It feels like the easy money has been made.
To get a better sense of how markets have reacted to booming gains like this, I looked at the returns over the ensuing one, three and five year periods to see what happened after enormous gains of the past.
To do this I took every 12 month gain of 50% or more since 1950 in the S&P 500 and then calculated the following 12, 36 and 60 month gains to see how much follow-through there was.