Indeed, high inflation during the 1970s and early 1980s forced Fed vigilance. ![]() As such, they didn’t allow rates to get too far above or below the economy’s natural rate. So why are the most recent drawdowns worse than those before 1990? Before 1990, the Fed was more active. Of the six other experiences, only one, 1974-1977, saw a drawdown worse than the average. The three most recent episodes saw larger-than-average drawdowns. The average maximum drawdown from the start of each rate reduction period to the market trough was 27.25%. Since 1970, there have been nine instances in which the Fed significantly cut the Fed Funds rate. Their conditioning may prove harmful if the past proves prescient. If you survived 2020 as an investor without making an avoidable or unnecessary mistake, you outperformed this year.Like Pavlov’s dogs, investors buy when they hear the pivot bell ringing. It’s worth remembering what your personal goals and circumstances are when you hear so many people bragging about how much money they made or how huge their returns have been.Īs long as you stayed true to your investment plan and continued making progress towards your personal and financial goals, that’s a win in my book.Ģ020 may look easy with the benefit of hindsight but it most certainly was not for those of us who lived through it. Even people who seem like they don’t deserve it. Someone will always be richer or have better performance numbers or pick better stocks than you. Worrying about this fact of life is pointless because as Michael Santoli so astutely pointed out this past week: There will always be people who make more money than you in the markets or life in general. Most of us didn’t time the bottom perfectly or navigate this year with a surgeon’s precision.īut success in the markets doesn’t require precision, just the ability to stay in the game. Or they profited off options trading or bought the right stocks for 2020 or owned an inordinate amount of crypto or Zoom or Peloton or whatever else worked this year. Someone timed the bottom perfectly by sheer luck. So while certain investors saw extreme gains this year, there were those who didn’t fare as well.Īnd hearing stories from those who did extremely well doesn’t help matters. Three sectors experienced losses in 2020, with energy being the biggest loser ( yet again): There were still opportunities to underperform. Now here comes the hard part about these numbers. Volatility, of course, works in both directions. Long government bonds (TLT) -3.9% *the only loser on the bunch.These are the returns from the day the stock market bottomed on March 23rd through year-end: That 9-month bull market has been a sight to behold. ![]() And the magnitude of the moves in 2020 might be even more impressive (if that’s the right word for it) considering we basically had a 4-week bear market followed by a 9-month bull market. So 2020 wasn’t exactly 2008 but it was darn close. Here are the same daily stats from that year: Living through the 2008 crash was my indoctrination into real market volatility so I thought it would be fitting to compare the two years. These enormous moves all occurred during the intense March sell-off because volatility tends to cluster during panics.īut it is crazy the entire bear market lasted just 4 weeks from peak-to-trough and we still had one of the most volatile market environments in years. There were also daily gains of 9.4, 9.3 and 7%. The S&P 500 experienced daily losses of 12%, 9.5% and 7.6%. And 1 out of every 10 days in 2020 saw a 3%+ gain or loss, which is more than four times the historical average. Take a look at the daily moves in the stock market this year in terms of magnitude:įor context, this is roughly double the long-term historical average for daily moves of 1% or more during a given year. Yes, there were 32 new all-time highs in the S&P 500 in 2020 but there was also an insane amount of volatility. These were the 2020 peak-to-trough drawdowns for a number of risk assets this year:ĭespite these awful drawdowns early in the year, every one of these assets finished the year with positive returns, many of the double-digit variety:īasically, everything made money this year despite losing plenty of money along the way.Īnd getting those gains this year was not an easy feat. Drawdowns & Melt-Ups: The Year That Was in the Markets
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