Investing

Why the market's historic ups and downs in 2020 are a reminder to invest for the long term

Twenty/20

Since March, the U.S. stock market has pretty much moved one direction: up. But in the wake of a historic rally, this past week reminded investors of the bumpiness that riddled the market earlier in the year.

The S&P 500 slumped 5.9% on Thursday for its worst decline since March, bringing the benchmark's three-day losses to more than 7%, though this benchmark rallied on Friday, up 1.3%.

Just as in February and March, when daily moves of 3% up or down practically became the norm, the latest bout of bumpiness is a good reminder for long-term investors to keep their eyes on the horizon.

Zooming out a bit helps to put the recent moves in perspective: The S&P 500 is up 5.4% in the past 12 months and about 45% in the past five years.

Optimism about a quick economic recovery was reflected by surging stock prices, and that created room for disappointment, says Nela Richardson, investment strategist of Edward Jones. It would have been hard to believe back in March that, come June, the S&P 500 would be up as much as 44%, she says. And the strength of the rally has been "almost as impressive" as the decline that sent stocks into a bear market

In general, the market's turbulence this year is a great reminder of a cardinal investing rule: Think about the long term, not the short term. "As an investor, you want to look ahead to the next 12 to 18 months instead of focusing on the next week or two," explains Michael Sheldon, executive director and chief investment officer of RDM Financial Group.

The market's historic ups and downs in 2020

On both the way down, and back up, the stock market made history this year. In just 23 days, the S&P 500 tumbled nearly 34% to enter its first bear market in more than a decade. This marked the fastest descent into this type of downturn in history. Then through early June, this benchmark notched its best 50-day rally ever.

That the market tumbled so quickly may have prevented some long-term investors from making a knee jerk reaction — like selling investments — that they'd later regret, notes Kelly LaVigne, vice president of consumer insights at Allianz Life. And the way the market has recovered "does seem to have had a positive effect" on investors' attitudes, he adds. 

Nearly 60% of Americans say the economic impact of the coronavirus pandemic has hurt their retirement savings, and 45% of the more than 1,000 respondents either reduced the amount they're saving for retirement or stopped altogether, according to the results of a quarterly market perceptions survey conducted by Allianz Life. The good news is 42% of these respondents said now is a good time to invest, the highest level in a year.

Investing in the market now could be intimidating for some younger investors, especially given the prospect of more bumpiness ahead, Richardson says. One of the key things to remember is that "you don't want to dump a lot of cash in at once," she says. A more prudent strategy is to invest small amounts regularly over time, or do what's known as dollar-cost averaging

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The outlook for the rest of 2020, and beyond

The recent turbulence shows that "the market might have gotten a little ahead of itself" in terms of expectations for economic growth, Sheldon explains. That said, there's reason to be optimistic about future gains in employment, corporate profitability, gross domestic product (GDP) growth, and confidence for both consumers and business owners, he says.

"We're starting to see some signs that an economic recovery is in its early stages," Sheldon says, adding that, in the near term, there could be other "potential speed bumps along the way." Those include the 2020 presidential election, trade talks between the U.S. and China, how quickly furloughed or laid off employees can return to work, and a potential second wave of Covid-19 infections, he says. 

We're starting to see some signs that an economic recovery is in its early stages.
Michael Sheldon
executive director and chief investment officer of RDM Financial Group

The recent surge in the stock market has seemed to be at odds with everything else happening in the country, including the Black Lives Matters protests, the surge in unemployment, and Covid-19 deaths. "There is a disconnect between Wall Street and Main Street, and we would like over time for that to narrow," Richardson says.

Still, it's important to remember that historically, the stock market has rebounded before the broader economy, Sheldon notes. In the Great Recession and subsequent bear market, stock prices started to go up in March 2009, while the economic recovery began in June 2009.

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What's more, investors can't ignore the importance of the Federal Reserve in recent months. The central bank has indicated it could keep interest rates near zero through 2022 and has pledged to do whatever is necessary to support the economy and financial markets ahead.

"The reason why the markets are optimistic is because of the Fed's involvement," Richardson says.

Overall, making sense of short-term moves in the market is difficult, given lingering uncertainties about a possible second wave of coronavirus infections and how long it will take for the U.S. economy to recover from the current recession, Richardson says.

"Early on, it became clear to us that the market had dismissed the magnitude of the downturn, and was instead focused on the quick bounce-back in the economy," she says. "If the rebound isn't as quick as the market anticipates, we might see some more bumpiness."

That's why "I think the slogan for 2020 is to expect the unexpected," Richardson says. And given the possibility of more turbulence, it's especially important right now to keep a long-term focus.

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