In the year following the global COVID shutdown markets have rebounded massively, with many indices experiencing their single largest rolling one year gain. This context is important, as despite the recent volatility, as an investor that invested in the S&P 500 on March 23, 2020 remains up 75% y/y, a staggering return . Furthermore, despite the recent pullback in technology stocks , the Nasdaq Composite remains up over 91% y/y. These levels of returns highlight not just the market’s optimism for the future, but also why it is important for long-term investors to maintain their discipline, stay invested, and take advantage of strategic risk taking opportunities.
Below we explore the trailing one year performance of key equity markets in the United States, as well as interest rate markets.
Investments in broad equity markets (i.e. passive) paid off over the past year
As discussed previously, statistically an investor deploying capital into a bear market (i.e. investing dry powder once the S&P 500 has fallen 20% or more) is likely to experience a positive return over the preceding year. Following the COVID-induced bear market in 2020 this trend continued to hold. In fact, an investor with the ability to maintain their long-term view in 2020 and opportunistically deploy dry powder into the market was rewarded with a return of over 75% y/y.
To put the return in context, JPMorgan currently forecasts US large-cap stocks (e.g. the S&P 500) to return an average of 5.1% annually over the next ten years. Based upon this forecast, a disciplined investor was able to “pull forward” nearly 15 years of returns by strategically, and opportunistically, deploying capital in 2020.
Despite wide dispersion in the S&P 500, nearly every stock improved over the trailing year
Even more impressive is the percentage of companies within the S&P 500 with positive performance. While there is wide dispersion between the best and worst performers (nearly 800%), all but three stocks in the S&P 500 have experienced positive one year performance.
With nearly every company inside the S&P 500 positive y/y it’s no wonder why so many new traders have entered the market – it’s been easy to pick winners. That said, we remind investors that blindly investing in risk assets is dangerous, as pullbacks and trend reversals happen often, and quickly.
The same situation holds at the sector level, with all 11 sectors experiencing positive one year returns. The surprise to many investors may be the Energy sector, which despite experiencing a 39% drawdown from June 2020 – October 2020 (while nearly every other section was improving), has since rebounded to be the strongest performing sector y/y.
Interest rates paint a different story
On the interest rate front, despite the Fed’s massive accommodative policies and continued low rate environment, yields on debt securities have pushed higher recently, weighing on fixed income performance. While there is clearly a battle going on between bond traders and the Fed, with the recent spike in rates passive fixed income remains positive y/y for long-term investors.
Long-term discipline paid off in 2020
Reflecting on the past year the market experienced unprecedented volatility, uncertainty, and structural changes. And yet, despite all this, continued to push higher.
When we talk with clients about long-term return expectations and portfolio construction we discuss designing portfolios to opportunistically take on risk. Markets will not always recover as quickly as they did in 2020, but with a solid portfolio foundation, a long-term view, and the ability to opportunistically deploy capital when extreme events occur, investors can position themselves for long-term success.
This commentary reflects the personal opinions, viewpoints and analyses of the author providing such comments, and should not be regarded as a description of advisory services provided by Defiant Capital Group or performance returns of any Defiant Capital Group client. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Defiant Capital Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.