2 timeless lessons for investors from the past year: Morning Brief

Sam Ro
·Managing Editor

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Monday, February 22, 2021

Things can go badly fast, but the market will look forward

A year ago, the S&P 500 (^GSPC) began its sharp descent from its then record high as the coronavirus started to get seriously priced into the stock market. From February 19 to March 23, the S&P went on to crash 34% from a closing high of 3,386 to a closing low of 2,237.

On Friday, the S&P closed at 3,906.

From that, investors can learn at least two very important lessons.

The first lesson: things can go badly suddenly and swiftly. It goes without saying, but it's worth repeating. Scary stock market sell-offs happen all the time.

Check out the chart below from JPMorgan Asset Management's Guide to Markets. Morning Brief readers will recognize it as we reference it quite a bit. It shows that the S&P 500 sees sharp intra-year drops almost every year, averaging a 14.3% drop since 1980.

Big stock market drawdowns happen all the time. (JPMorgan Asset Management)
Big stock market drawdowns happen all the time. (JPMorgan Asset Management)

These big sell-offs happen for any number of reasons. One unfortunate reason is unforeseen risks. Investors are constantly pricing in the various visible risks the market is facing. But unforeseen risks are generally considered unlikely and won't be priced into the markets at all. That is, until they happen.

Take, for example, the coronavirus pandemic. The negative impact to the economy clearly wasn't priced in on February 19. But it sure was priced in at least somewhat, if not too much, by March 23. During that month, economists were tripping over each other as they cut their GDP forecasts like there was no bottom in sight.

Now, there's lots to be said about what various types of investors should do when the sell-offs come. Ultimately, the secret to making better investments moves when markets are in turmoil is to already have a plan.

The second lesson: the market is forward looking. Investors don't invest in a business because of the money it is or isn't making right now. Investors invest because of all the money that's expected to be made in all the years down the road.

This largely explains why the stock market and the economy appear to decouple. The truth is, it's not so much that they decouple. Rather, they just reflect different things.

"While it’s difficult to pin down a date when we can expect our lives to completely return to normal, the stock market is already pricing in the normalization of daily life, even if that remains uncertain," LPL Financial analysts said on Friday. "Economic conditions around the world have been improving relative to how they were at the beginning of the pandemic. While pockets of weakness remain, the market is more concerned with where the economic conditions will be, not where they are currently." (Emphasis added.)

It's for this reason that stocks rally when things are terrible. It's for this reason why stocks bottom long before the economic data does.

None of this is intended to discount the tragedy of the coronavirus pandemic and the many other horrifying events that unfortunately riddle history.

Rather, it's a testament to human resilience, which is an incredibly bullish force investors can't afford to ignore as they think about where the market is headed in the years to come. A year after economists were warning of a "deep plunge" in activity, those same economists are now saying to "fasten your seatbelts" as COVID-19 cases drop and the economy surprises to the upside.

"It’s our jobs as investors to focus on our long-term goals,” LPL Financial Chief Market Strategist Ryan Detrick said. “Drawdowns and bear markets are part of the path to get there."

By Sam Ro, managing editor. Follow him at @SamRo

What to know today

Economy

  • 8:30 a.m. ET: Chicago Fed National Activity Index, January (0.50 expected, 0.52 in December)

  • 10:00 a.m. ET: Leading Index, January (0.3% expected, 0.3% in December)

  • 10:30 a.m. ET: Dallas Fed Manufacturing Activity, February (5.0 expected, 7.0 in January)

ALSO: Powell testifies before Congress, Airbnb and DoorDash debut earnings: What to know in the week ahead

Earnings

Pre-market

  • 6:00 a.m. ET: Dish Network (DISH) is expected to report adjusted earnings of 80 cents per share on revenue of $4.54 billion

  • 7:00 a.m. ET: Discovery Inc. (DISCA) is expected to report adjusted earnings of 71 cents per share on revenue of $2.83 billion

  • 8:00 a.m. ET: Royal Caribbean Group (RCL) is expected to report an adjusted loss of $4.94 per share on revenue of $55.72 million

Post-market

  • 4:00 p.m. ET: Diamondback Energy (FANG) is expected to report adjusted earnings of 81 cents per share on revenue of $769.38 million

  • 4:00 p.m. ET: Marathon Oil (MRO) is expected to report an adjusted loss of 20 cents per share on revenue of $850.43 million

  • 4:05 p.m. ET: ZoomInfo Technologies (ZI) is expected to report adjusted earnings of 10 cents per share on revenue of $130.5 million

  • 4:05 p.m. ET: The RealReal (REAL) is expected to report an adjusted loss of 41 cents per share on revenue of $93.42 million

  • 4:10 p.m. ET: Palo Alto Networks (PANW) is expected to report adjusted earnings of $1.43 per share on revenue of $980.25 million

  • 4:15 p.m. ET: Occidental Petroleum (OXY) is expected to report an adjusted loss of 59 cents per share on revenue of $4.31 billion

Top News

Boeing 777 planes grounded in Japan and US after mid-air engine fire incident [Yahoo Finance UK]

European markets muted ahead of UK COVID-19 lockdown announcement [Yahoo Finance UK]

Activist investors nominate nine directors to Kohl's board: WSJ [Reuters]

Bitcoin slides 6% to below $55,000 [Reuters]

Yahoo Finance Highlights

Bill Gates: US faces 'tricky' task working with China on climate change

'We could be approaching herd immunity': Epidemiologist on coronavirus pandemic

Two NYC bars are for sale — asking price is 25 bitcoin

—

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Click here to get e-mail alerts when new stories are published.—With Dan Murtaugh, Naureen Malik, Akshat Rathi, Jess Shankleman and Eric Roston For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.

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