An Amazing 20 Months for Stocks! Now what?

Advice for Accumulate, Sustain, and Distribute Investors

An Amazing 20 Months for Stocks! Now what?


  • Since January 2020 the S&P 500 is up 41.4% and earnings are projected to be 37% higher (2022 estimates).
  • Going forward we expect both earnings growth and stock prices to rise more slowly.
  • Looking ahead, we offer advice tailored to Accumulate, Sustain, and Distribute investors.

A year ago on August 21st, the S&P 500 surpassed its pre-COVID-19 high of 3397. Many thought that was a remarkable feat given the news at the time. It is now at a record high of 4468 (as of August 16, 2021) roughly one year later. The stock market has, as it often does, been the most astute forecaster of the economy and corporate earnings. Due to exceptionally low interest rates providing a miserable alternative, stocks have anticipated and ‘pulled forward’ the outlook for continued gains in earnings.

Let’s pause for a minute and reflect on that. Prior to the COVID-19 pandemic, the S&P 500 was enjoying an exceptional decade of gains, (following more than a decade of flat returns starting in 2000, a period sometimes known as the ‘lost decade’). In January 2020 stocks seemed reasonably valued to us, with the S&P 500 at 3230. In our 2020 outlook we were expecting 6-8% gains for the year, with 15% or more in our optimistic case. Optimism prevailed, despite the pandemic and the return of the S&P 500 was just over 16% in price terms for 2020. So far in 2021 the S&P 500 has added another 19% an amount few, including us, were forecasting. If the last 18 months have taught us anything it is surely the danger of relying too much on forecasts, and of reacting emotionally to events. This re-enforces our mantra of ‘process over prediction’ as our balanced portfolios have been overweight stocks for all of 2021.

Past performance is no guarantee of future results. Shown for illustrative purposes. Not indicative of RiverFront portfolio performance. Index definitions are available in the disclosures.

All of this is illustrated in the chart above which shows the price of the S&P 500, its longer-term moving average (200-day) and it’s shorter-term 50-day moving average. We highlight the pre-COVID-19 high, the breakout above that high and the current trend since that time. We think it illustrates just how exceptional this period has been. The total return, including dividends, of the S&P 500 is 41.4% since January 1st, 2020, rewarding investors who have held on during the pandemic. In the chart we have also drawn a trend line to capture the current annualized rate of advance which has been 35% since early November 2020 right around the election, showing that the market is neither ‘red or ‘blue’ but responds mostly to earnings and interest rates. Current estimates for S&P 500 2022 earnings are $215, and this year is now expected to come in at $195.61. By way of context, earnings for 2019 and 2020 were $157 and $122 respectively. With earnings projected to be 37% higher than the 2019 pre-COVID-19 peak, the market’s 41.4% rise becomes more understandable. That said, we recognize that, with earnings growth slowing, the rapid trend line of the last 9 months is unlikely to be sustained for much longer, and at some point the pace of advance will slow to a more reasonable rate. This can occur by a period of sideways movement such as occurred in September and October last year or by a sharper correction.

We believe this has been a great time to be a stock investor but what now? We offer advice to our 3 client profiles Accumulate, Sustain, and Distribute.

Sustain and Distribute investors: Sustain investors are those in the period leading up to retirement and Distribute investors are those taking distributions in retirement. We suggest both groups, especially Distribute investors take advantage of the market’s strength to rebalance portfolios to your desired long-term mix if you have not done so. Think of it this way, the market has already paid for some of your spending needs in advance and we think it is prudent to lock in those gains. How would this work? In a hypothetical example let us assume an investor had $100 in a 60/40 mix of stocks and bonds as of January 1, 2020. The $60 in stocks is now worth $84.8 (+41.4%). In the same timeframe the Barclays Aggregate Index of bonds has gained 6.3% and so the $40 in bonds is now worth $42.5. Thus, the original $100 is now worth a total of $127.3 and the stock bond ratio is now 67/33. To maintain a 60/40 mix the investor would need to reduce their stock holdings, thereby locking in the gains. In RiverFront’s asset allocation portfolios this kind of rebalancing happens regularly and any deviation from our benchmarks is due to a deliberate tactical decision by the portfolio team.

Accumulate investors are those saving for retirement or other goals. Our advice for Accumulate investors is to invest systematically to take advantage of market declines as well as market advances. We call this ‘dollar cost averaging’. Many Accumulate investors fear bear markets when they see the value on their statements decline. We understand this can be emotional, however our message is to look at it differently and embrace those declines as an opportunity to buy at lower levels. Those who bought all the way through 2020 experienced exactly this.

In conclusion:

The last 20 months has been an extraordinary one for investors. We assert that no one could have predicted the magnitude of the decline in Q1 2020 or the strength and duration of the gains since that quarter. Our process has helped us navigate through a journey that we could not have anticipated and has increased our confidence in combining fundamental research with a tactical overlay. We think stocks will be higher in the next 18 months but will not continue rising at the same pace and may need to move sideways for a quarter or two at some point to consolidate the gains already made. We believe the stock market will continue take its cue from interest rates and expected earnings giving us a good read on the path of both. We suggest Sustain and Distribute investors rebalance portfolios whose allocation has deviated from long term plans and encourage Accumulate investors to continue dollar cost averaging and observe how it can work in volatile markets.