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“A good summary of investing history is that stocks pay a fortune in the long run but seek punitive damages when you try to be paid sooner.”
—Morgan Housel, partner at The Collaborative Fund and former columnist at The Motley Fool and The Wall Street Journal

By this time last year, the World Health Organization had declared Covid-19 was a worldwide pandemic. In the U.S., stringent measures were implemented to slow the spread of disease and “flatten the curve.” The lockdowns and shelter-in-place orders dealt a body blow to U.S. economic activity.

Investors who attempted to forecast economic activity over the first six to nine months of the pandemic had no prior experience by which to gauge a shutdown and eventual reopening of the economy. It was if we were driving through a dark and foggy night with no headlights to guide our path.

As a result, investor reaction was swift, and the first bear market since 2009 descended upon us. Volatility was intense. In just one day, March 16, 2020, the S&P 500 lost nearly 325 points, or 12% of its value. That one day accounted for 28% of the index’s approximately 1,150-point drop from peak to trough loss. It was a swift decline, but it was the shortest bear market we’ve ever experienced. The bear market lasted just barely over a month.

The ensuing rally has been nearly as unprecedented. Since bottoming, the S&P 500 Index advanced an astounding 87% through April 30, 2021. On April 29, the S&P 500 closed at 4,211.47, the 10th all-time closing high just in the month of April. And that is on top of a series of 18 new highs since the beginning of the year.

Let’s back up, open the aperture, and take a broader view. If we review the six longest bull markets since WWII, the S&P 500’s recent advance over the first year tops all other prior bull markets. In second place at 72.4%, compared to the recent ~87%, is the bull market that began in March, 2009. That run lasted into February of 2020.

But we want to caution you that past performance doesn’t always guarantee future results.

Where are we heading from here? You’ve heard us say that no one has a crystal ball. No one can accurately and consistently predict what will happen to stocks.

So, let’s not discount the possibility of a bumpy ride this year. Regardless of whether we are in a bull or bear market, we know from market history that the markets randomly and unpredictably go down about 14% every year.  Further, one out of every 5 years, the markets pullback ~30%.

Up until now, investors have focused on the rollout of vaccines and reopening of the economy, and the benefits these are providing. Yet, bullish enthusiasm can sometimes spark unwanted speculation. Today, momentum favors bullish investors, but valuations seem stretched, at least over the shorter term. When markets are surging, there is a temptation to load up on risk. Yet, we’d counsel against being too aggressive.

Just as the investment plan takes the emotional component out of the investing decision when stocks are falling, it also erects a barrier against the impulse to load up on riskier investments when shares are quickly rising. It has always been a great mistake to react to market volatility, whether it’s up or down. Life is full of changes, and, when they come, adjustments to your plan may be appropriate. Ups and downs in stocks are rarely a reason to make emotion-based decisions for our portfolios.