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Encouraging context for volatile quarters

2020 bills MTNews

By Kyle Tetting

At the halfway point, 2020 has been a disappointing year for investors. “Disappointing” might not be strong enough to describe the economy or many other measures of the year so far, but for investors, it’s fitting—with a little perspective.

In the first quarter, the S&P 500 lost 19.6%, including dividends. From the market peak in February, the drop-off was an even more jarring 33.9%. In the span of a month, the S&P transitioned from new market highs to one of its worst quarters in history.

On the heels of that historic quarter, though, investors were rewarded with the best three months in more than a decade.

The S&P recovered 20.5% in the second quarter and sat just 3.1% below where it began the year. That’s despite any resolution on the coronavirus pandemic. While it wasn’t enough to cancel out the magnitude of first-quarter losses, stocks’ rapid rebound caught many investors off guard.

Additionally, the further back we look, the more encouraging stock performance becomes. The decade after the financial crisis was an exceptional period for investors, with annualized returns reaching 14% for the 10-year period. Even more impressive, such returns are unusual for a low-inflation environment like the one we’ve navigated since the financial crisis. Investors lost less of the return to the effects of inflation.


Please note that the returns in the accompanying chart include both the terrible first quarter of 2020 and the terrific second quarter of 2020. While it may not be fair to smooth over the volatility that 2020 has brought so far, remember that we don’t invest in stocks with just the next quarter in mind. So, to say 2020 has been a disappointing year also requires putting it in the proper context.

And, with context in mind, there’s a critical flaw in looking only at where we’ve been. It is very unlikely that the next 10 years will look like the last 10. Furthermore, while long-term investors have the luxury of patience, we can’t overlook the significant challenges of the next few quarters. There’s no shortage of bad news or reasons to remain cautious in the near-term, but expensive stocks today suggest longer-term returns will look more muted in the next 10 years than they did in the last 10.

The good news in all this is that investors don’t need the next 10 years to look like the last 10. While 10% a year returns for stocks are nice, it is far more aggressive than what we calculate into our long-term assumptions. A year or two of more muted returns simply brings us back toward those assumptions.

The strong returns of the second quarter offer a critical lesson. Notably, amid heightened volatility and significant uncertainty, it doesn’t take much for stocks to surprise. The trick for investors is to avoid the desire to react. The trick is to recognize that we can’t always know what comes next. We accomplish this trick through a heavy dose of humility, which is reflected in the investment balance on which we keep insisting.

Kyle Tetting is director of research and an investment advisor at Landaas & Company.

Learn more
Venturing out after hunkering down, by Kyle Tetting
Preparing for what comes next, by Kyle Tetting
Keeping balance in unnerving times, by Bob Landaas
From peak to bear, now seeking normalcy, by Kyle Tetting
Corrections: A normal part of investing, a Money Talk Video with Marc Amateis
Talking Money: The importance of balance, a Money Talk Video
(initially posted July 2, 2020)

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