As long-term investors we are constantly studying the past so that we may learn from previous market environments and apply that knowledge going forward. However, relying too much on the past to dictate the future can be problematic, as the past rarely repeats itself the same way in the future. Similarities between past events and current events occur, but often times the underlying causes and implications are different. We implore investors to study past markets, but caution against relying on that knowledge blindly.
2009 Market Selloff and Recovery vs Today (2020)
We’ve spent a lot of time recently discussing the current market environment vs. 2009, as similarities such as market concentration, valuations, and fiscal stimulus beg for comparisons to be made. In addition, comparing the 2009 market drawdown and subsequent rally to 2020 is an easy comparison to make. A cursory glance at the economic environment also appears similar – a soft economy, high unemployment, and potential credit concerns. Furthermore, both economic environments faced extreme volatility and uncertainty, and both benefitted from massive fiscal and monetary stimulus to stabilize the economy.
Looking at a simple return of both markets side by side, market performance would also imply a similar environment – similar S&P 500 drawdowns and then recoveries (although it’s worth pointing out the 2020 drawdown was steeper and faster).
Based on the market performance and overall economic condition similarity one might look to 2009 as a playbook for investing in 2020. However, in our view surface level market similarities are where the similarities end, as the underlying market dynamics in 2020 are very different from those of 2009.
Underlying Market Dynamics and Return Dispersion
Our focus for this analysis is return distribution within the S&P 500.
While the overall market returns in 2009 (thru July 2009) and 2020 (thru July 2020) are similar, the distribution of returns, both across stocks and sectors, is very different. In 2009 the market rally was broad, with over 65% of stocks exhibiting positive performance by this time that year. In contrast the 2020 market rally has been concentrated, with only 38% of stocks in the S&P 500 positive year to date.
Furthermore, the distribution of returns between the two years is very different. In 2009 there was a significant skew toward positive returns, with the largest grouping of returns being those experiencing an over 50% YTD return. In 2020 the return skews negatively, with the majority of stock returns negative, and only a handful of companies experiencing positive returns over 50%.
Digging deeper exposes even more dispersion, as sector returns and individual stock leadership are both very different in 2009 vs. 2020.
Market dynamics are difficult to predict
Markets rarely present the same opportunity twice. What looks similar on the surface tends to have very different underlying factors and details. And even when macroeconomic conditions and reactions seems similar (e.g. massive fiscal/monetary stimulus), market dynamics can be very different as investors reward different sectors and business models. When investing, investors must always learn from the past, but be willing to adapt to the future.
ENDNOTES
Disclosures
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.