Happy anniversary to a remarkable rally
April 01, 2021
Last week marked the one-year anniversary of the market bottom in the early days of the coronavirus pandemic, after the sharpest bear market for stocks on record. The S&P 500® Index lost 34% in just 22 trading days last year, but the 77% rally off the bottom represented the best 12-month performance for the benchmark stock index since 1936.
The rally has been broad-based across the equity spectrum, though its complexion has shifted over the ensuing year. Initially, the sectors that led the market before the bear market—technology and healthcare—were the relative winners. But as the recovery took shape, investors shifted to pro-cyclical sectors and asset classes, such as industrials, financials, small caps and emerging markets. The rally in the S&P 500 has eclipsed the bear market decline by more than a two-to-one ratio (+77% vs 34%). Most other equity indexes followed a similar pattern, though the rally in small caps was closer to a three-to-one ratio.
Bond market performance was far more complex. The Bloomberg Barclays Aggregate US Bond Index was modestly lower during the stock bear market and has turned modestly positive since. High yield bonds followed a similar pattern to equities given their credit exposure, rallying 34% after a 22% decline. Long-dated Treasuries, however, followed a reverse course, rising in value during the equity bear market as interest rates fell, then declining as rates recovered.
An investor who bought the S&P 500 at its February 2020 peak and held on till present day would have gained an impressive 17%. A 60/40 portfolio of the S&P 500 and the U.S. Aggregate Bond indexes would have returned 11% in just over a year despite unprecedented challenges. The recent rally was driven by optimism surrounding government stimulus, a reopening economy and improving COVID-19 data. With many of those positive catalysts now priced in, investors are seeking a new catalyst to keep the rally going.
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