New Precedent, New Challenge?

From Ben Carlson:

"The market lost roughly 34% from late-February through late-March and then proceeded to gain more than 52% to make it all back. It took just 23 trading days on the way down and 97 on the way back up."

This was a remarkable selloff, and an equally remarkable recovery. The contrast of this relative to the market recovery during Great Depression is stunning:

"The Great Depression stock market crash technically lasted 4 years or so but the effects from that downturn lasted a generation. On a price basis, the stock market didn’t reach the 1929 highs until the 1950s."

While the impact of the pandemic will continue to reverberate long after the stock market recovery, let's focus on the market. The swift response from the central bank and government seemingly corresponded with the market bottom back in March. They clearly felt that the costs to delay action or not bring enough ammunition to the table outweighed the potential downsides of doing too much. Has this set a precedent for how market cycles move going forward? Possibly.

If this is the case, I do believe there are ramifications for the individual investor. It was always dangerous to play games with a portfolio allocation based on short-term forecasting. If in fact markets are moving more quickly and returns are condensed into shorter periods of time, short-term thinking may be more detrimental than ever before. You could be thinking, I'm out of the market for a few weeks, there's no harm in that. Meanwhile, three years worth of returns required to meet a wealth accumulation target could come to fruition during those two weeks. While this was always a possibility throughout market history, there's no doubt it has been more prevalent in recent years. It's more important than ever not to view being out of the market while you 'let things pass' as some illusion of safety. It could in fact be quite costly.

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^{Source: The Flying V-Shaped Recoveries (A Wealth of Common Sense)}

^{The content in this article was prepared by the article’s author. Voya Financial Advisors, Inc. does not endorse its content, and the views expressed may not necessarily reflect those held by Voya Financial Advisors, Inc.}