A Year from the Market Trough: 3 Trends and 3 Takeaways

Last week marked a year since U.S. stock markets reached their trough, a period that saw the S&P 500 plunge 34% in just 23 trading days, as investors absorbed the implications of a global pandemic.

With distance between those volatile days, we wanted to reflect on three major investment themes that have taken shape since then. More importantly, we wanted to share three takeaways that we hope investors will remember in the future.

3 Themes That Emerged During the Rebound

ESG Interest Skyrocketed. In response to the pandemic, a growing cohort of investors took more interest in how corporations responded to the outbreak, including how they treat their employees, their customers and the broader community. Flows into sustainable open-end funds and ETFs totaled $51.1 billion in 2020, more than double the flows of 2019 and almost 10 times as much as 2018.1

Retail Investment Grew Substantially. Trading apps, fractional shares and an environment where consumers had limited spending options all converged to encourage more retail participation in markets. In the first half of 2020, individual investors accounted for nearly a fifth of all shares traded in U.S. markets, nearly double their proportion in 2010.2

By and large, we believe more retail interest and participation in investing is a good thing. But it has also played a role in fueling some speculative bubbles, such as the GameStop phenomenon in January and early February.

Indices Became More Concentrated. As investors gravitated toward a few tech related stocks that were seen as beneficiaries of a stay-at-home environment, Facebook, Amazon, Apple, Netflix, Google and Microsoft soared and played a large role in driving indices higher. In our view, it was too large of a role. We wrote about our concerns of concentration risk in indices in early May, when the five largest stocks in the S&P 500 accounted for more than 20% of the index. While these stocks still make up a large portion of indices, the theme has abated somewhat in 2021 as many technology stocks underperformed.

Looking Back: 3 Takeaways Investors Should Remember

Sector Bets Are Dangerous. We’ve long held this belief, and it’s a reason our strategies are sector neutral relative to their benchmarks. But both the selloff and rebound have highlighted how hard it is to make sector calls.

Heading into 2020, the backdrop for energy and financial stocks looked great. A Barron’s 2020 outlook included sector calls from 10 of Wall Street’s most famous investment strategists and all 10 recommended an overweight to either financials, energy, or both. By the end of March, the S&P 500 energy sector was down nearly 52%, and the financial sector – the index’s next biggest laggard – was down 31%. Both sectors have been strong performers in recent months, but the unpredictable performance of those sectors in 2020 underscores the risk of a large sector bet.

The Fed Still Has a Powerful Grip on Markets. The Fed’s influence on markets is not new, of course. But one of the most common questions clients asked us over the spring and summer was why Wall Street and Main Street seemed so disconnected. The economy was still experiencing significant pain, but stocks rebounded quickly starting at the end of March.

We wrote about the disconnect, but in short, the market was confident about the safety net the Fed and the government had provided. Given the size and scope of that safety net, markets started looking ahead to when the quarantine will eventually end. The Fed’s ability to calm markets in times of economic stress is worth remembering when stocks are down. And this brings us to our last point:

Stay Invested, and Don’t Try to Time Markets. It seems simple, but it’s one of the most important lessons investors can learn from a downturn and a rebound, especially one as quick as this one. While stocks hit their bottom in just 23 trading days, the rebound was almost equally impressive. In a span of just 126 trading days, the S&P 500 went from its peak, to the 34% drop, and then back to new record highs. Anyone who jumped to the sideline when markets troughed would likely have missed much of the rebound before having the confidence to reinvest.

For advisors and consultants, we know that keeping clients invested is a tough, but crucial, role. To close this reflection, we wanted to share another blog from 2020, which was one of our most read for the year. It shares five key stats to help keep your clients invested through a volatile market.

We hope you won’t need it anytime soon.


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1 https://www.morningstar.com/articles/1019195/a-broken-record-flows-for-us-sustainable-funds-again-reach-new-heights

2 https://www.wsj.com/articles/individual-investor-boom-reshapes-u-s-stock-market-11598866200

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