How Can I Make the Most of the Recent Stock Market Rebound?

Buckingham Chief Investment Officer Jared Kizer, CFA provides perspective on the scope of the hot streak and each “slice” of the stock market has been impacted.

Transcript

Tim Maurer:

Hello. Tim Maurer back with another episode of Ask Buckingham, a video podcast designed to bring clarity in the midst of confusion by connecting your great personal finance questions with straightforward answers from industry thought leaders. Today’s questions will be answered by Jared Kizer, Chief Investment Officer of Buckingham Wealth Partners. And Jared we have, thankfully I’ll say, seen a massive rebound in the stock market over the course of the past year, a run that seems to have started well before the clouds of COVID-19 even began to part. Can you give us some perspective on the scope of this hot streak and an idea of why in the world it happened?

Jared Kizer:

Yeah. Absolutely, Tim. So, rewinding back to the start of the COVID and how it impacted the markets we had, just to remind folks, I know we all loved that we had just an insanely volatile couple of weeks with just huge, huge negative returns for all stock markets. Including the US market with the US market down about 40% in a two-week stretch. I mean, just almost unprecedented in terms of the speed at which this happened coming out of the great periods in the late 2010s. And at the time we said, of course, this is one of the fastest drops that we’ve ever seen. But when we look back at what tends to happen in the aftermath, in terms of trying to keep clients disciplined, we know that more often than not you do see markets rebound well before, as you said, the news is entirely positive.

Jared Kizer:

And certainly, the last year-plus has been still a lot of negative news on the health front and other fronts still, unemployment relatively high. But even though I knew, certainly, the history of what tends to happen after markets drop, I would’ve never guessed it would be the magnitude of what we’ve seen with just looking at the US market alone, up about a little bit over a 100% from that low point. Now well, well above where it was even before COVID hit. And also importantly, for the way we think about investing, if you look at the smaller cap and more value stocks which got hit even more heavily during COVID, a lot of those markets are up somewhere 150%-plus from their low. So just an unprecedented rebound, again, in line with what we tend to see, but certainly well beyond even what I would have expected.

Tim Maurer:

Yeah. So am I hearing you correctly that maybe especially when we see some really deep downs in the market that may be when you would expect a rapidly accelerated climb back? Is that in any way proportionate that if you experienced a very fast and heavy downward cycle, you may expect that in the future it will be a relatively rapid run back up?

Jared Kizer:

Yeah. I personally think that’s true. The challenge though, we don’t have a lot of periods to look at where it’s been that quick and that sharp. So generally, I think that’s true, but of course, it will vary a ton from case to case. Because again, even though we’ve got a long, long history for the US market, we’ve got two or three instances, maybe, that were anywhere nearly as sharp and as quick as what we saw in early 2020. So, definitely think that’s generally true, but not a lot of past instances to look at there as reference points.

Tim Maurer:

Yeah. And you mentioned small and value as two additional ways to slice up the markets. And while we have a tendency to refer to the stock market as though it’s just one thing in the singular, it’s really stock markets, it’s a host of different dynamics. What slices of the stock market have led this rebound, and is there any evidence to support that that has been the case in the past?

Jared Kizer:

Yep. So, that gets to another thing that we were communicating back over March and April is that the stock market is multidimensional. It’s interesting, a lot of folks, I think, realize that with the fixed income markets more readily; you’ll hear people refer, even individual investors, refer to different parts of the fixed income market. But the stock market always gets treated as this monolith when it’s really not.

Jared Kizer:

And what we saw during COVID was against smaller company stocks, value stocks definitely got hit substantially more heavily. And I think probably rightly so, because they were in the crosshairs of a lot of the specific impacts that COVID had. But that’s also what you tend to see when the stock market gets hit regardless of cause, you do tend to see small stocks decline a little bit more, but those have certainly led the rebounds. So, the nuance here is important because we’ve seen those areas that got hit the hardest have rebounded the most. And that, again, also aligns with what you tend to see and what we were communicating back in March and April is that if we do see a rebound, you’re likely to see an even stronger rebound from some of the areas that got hit the hardest, particularly smaller stocks, emerging markets, potentially some of these areas that got hit more heavily. And that’s definitely, thankfully, held true to form with this particular occasion.

Tim Maurer:

Mm-hmm (affirmative). And you’ve mentioned small and value a couple of times. I think small versus large, it’s kind of easy for our brains to comprehend, but can you talk about the distinction between value companies and growth companies? What is it that makes a value company and why is it that small and value seem to be that premium opportunity for investors overall a long stretch of time?

Jared Kizer:

Yeah. So, value stocks, just think of those as stocks that are trading at really low prices to growth stocks. So, growth stocks tend to be the names that are a little bit more well-known, have higher earnings-growth rate. Whereas value stocks will tend to be just lower-priced stocks that have lower amounts of earnings that they’re generating as companies. And you hear those two and you think, “Well, wouldn’t I want to own always the growth side?”

Jared Kizer:

Well, maybe somewhat surprisingly again, the long-term evidence very, very clear that value stocks have actually generating higher returns than growth. But during the COVID downturn, we definitely saw those value stocks get hit more heavily. Lots of theories as to why. I think, partially, there’s a tech-related aspect to that; a lot of the more tech-oriented companies would tend to fall in the growth bucket. Of course, in this remote world that a lot of us have been fortunate to inhabit, those companies just weren’t impacted as severely. So you saw not just small stocks decline more than large company stocks, but also value as a group that declined more, but has rebounded much more substantially as we’ve started to see economies open up and we’ve gotten the positive news on the vaccine front across a lot of different implementations there.

Tim Maurer:

All right, Jared. So, markets move and they do so unpredictably and sometimes they can do so with a violent and rapid pace, both on the downward side and the upward side. And the market isn’t just one thing, it’s not monolithic; there’re a bunch of different slices of the market and they tend to move at different periods of time. I think we’ve got it. But now, what is the application? What is the takeaway for us as investors? How can we apply the wisdom that you’ve just shared for the future so that we might benefit from it?

Jared Kizer:

I think it’s all about discipline, which I know is a topic that you talk a lot about, that we talk a lot about when we get together on these in some form or another. It’s just another illustration of when things look the darkest in terms of financial markets, more often than not, that doesn’t just continue to go. You tend to see some type of rebound there, and it’s challenging. Because again, we’ve put ourselves back in that March/April time set.

Jared Kizer:

Even outside of the health things, just looking at the financial side, it was a scary time. There’s definitely that temptation to think, “Oh my goodness. It’s only going to get worse.” But we know that’s typically not the case, and it just is another instance, I think one of the most significant, probably, in most all of our lifetimes in how important discipline is in investing. Because we’ve seen a rebound that is unprecedented in a lot of ways and that rebound coming on the heels of one of the biggest health and overall global events that any of us have ever experienced. So just, I think, discipline is the word here. Just another great example of how important it is to stick with what you’re doing.

Tim Maurer:

Yeah. Well, Jared, I got to tell you; it feels a little bit easier to be disciplined when we can look back and we’re happening to enjoy a period of upward growth in the markets. Do you promise to remind us again when we’re in the midst of one of those times?

Jared Kizer:

I will. I’m sure we’ll be back together whenever that next event happens. Hopefully no time soon.

Tim Maurer:

I’m sure we will. And hopefully no time soon, indeed. Thank you, Jared. And thank you for tuning into this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating to the website askbuckingham.com or by emailing your question to question@askbuckingham.com. Just click in the upper right-hand corner of your screen and it’ll take you directly to the website.

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