It has been one year since the World Health Organization declared the Covid outbreak a pandemic. If we travel back to March 2020, we were bracing for lockdowns, shelter-in-place restrictions, and traveling to the grocery store to stock up on staples.
The jolt to the economy and fear of Covid led to the steepest downturn in economic activity that’s ever been recorded. The lion’s share of the damage occurring in Q2, which saw a record 31.4% annualized drop in GDP (U.S. BEA—quarterly records date back to 1947).
Meanwhile, the S&P 500 Index lost 34% of its value in a little over one month, according to S&P 500 data from the St. Louis Federal Reserve.
With uncharacteristic speed, the Federal Reserve jumped into action, announcing a host of new programs. Its response went well beyond the 2008 financial crisis.
The Federal government quickly passed the $2.2 trillion CARES Act, which provided generous jobless benefits, stimulus checks, paycheck protection loans, and more.
Investors reacted to the generosity and anticipated a robust economic recovery. By the end of August, the S&P 500 Index surpassed its February high (St. Louis Federal Reserve data).
In Q3, GDP rose a record 33.4%. A new relief package was passed at the end of December, and a much costlier bill, the American Rescue Plan Act, was signed into law last month. While the $1.9 trillion bill price tag has led to criticism, it will send a tsunami of money into the economy.
Nonetheless, the pandemic has created economic distortions that have yet to dissipate. The trend towards online buying has accelerated, and big box retailers that were deemed essential have excelled.
Though we are seeing progress, some service-related industries have struggled to adapt to the new normal and remain well below pre-pandemic output.
Government support and U.S. economic resilience
The rollout of the vaccines, trillions of dollars being injected into the economy, and very low interest rates have supported economic grow hand helped fuel the stock market rally over the last year.
Since bottoming on March 23, 2020, the S&P 500 Index has gained an astounding 77.58% through March 31, 2021. Figure 2 highlights the performance of the longest running bull markets since WWII.
After one year, today’s bull market is just ahead of the one-year performance of the last bull run, which began in March 2009. But it’s important to point out that a fast start is not always indicative of future performance.
The long-running bull market of the 1990s was ranked last after the first year.
Where are we headed from here? Much will depend on the economy, corporate profits, Federal Reserve policy, bond yields, and inflation. They have historically been the key drivers of stocks.
The Fed raised its outlook in March, boosting its 2021 GDP forecast from December’s estimate of 4.2% to a fast-paced 6.5%. The rollout of the vaccines and new government money are largely responsible for the outlook, though I must caution, as most economists missed the strong rebound, forecasts are simply educated estimates.
Still, the economic outlook is favorable based on today’s information.
Reviewing second-year S&P 500 performance from bull markets that were born out of a bear market that registered at least a 30% decline: +17%average return in the second year, including a 10% peak-to-trough decline(LPL Research; past performance is no guarantee of future results).
While the fundamentals have been favorable, never rule out the possibility of volatility.
If you have any questions or want to discuss any other matters, please let us know.
1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
4 The Global Dow is an unmanaged index composed of stocks of 150 top companies. It cannot be invested into directly. Past performance does not guarantee future results.
5 CME Group front-month contract; Prices can and do vary; past performance does not guarantee future results.
6 CME Group continuous contract; Prices can and do vary; past performance does not guarantee future results.
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