What a difference three years makes. On March 9, 2009 the current bull market was born out of a punishing market bottom. That day, the S&P 500 dropped to a 12-year low of 676. The Dow fell to 6,547. That market low was preceded by 17 months of decline, during which the S&P 500 lost 57% from its 2007 high.
Now the bull market is three years old. The S&P 500 has recovered, and doubled. And a couple of weeks ago the Dow closed above 13,000 for the first time since 2008 (which was significant only in that it was a psychological level…but not logically meaningful).
And this bull market, built on easy money courtesy of the Fed, was the first to regain 100% of its decline within three years…and the seventh best percentage gainer of all time.
But it hasn’t been a smooth ride. The summer of 2010 saw a decline of 16%, and last summer the market retreated 19%. And last year’s volatility cast a shadow over the markets gains. That shadow, combined with the wealth destruction that came with the decline a few years ago, has kept many investors on the sidelines, too nervous to re-enter after being scarred in 2008.
But pessimism hasn’t paid off. Sitting out has meant missing out. But that’s human (and investor) nature. Fear rules when the market shows its ugly side. And that fear has shown itself in fund flows: as of January, the bull market has seen investors pour $261 billion into stock funds, and $708 billion into more conservative bond funds, according to the Investment Company Institute. Investors have proven themselves willing to forgo market gains in exchange for the paltry returns of money market funds and Treasuries. And it has shown in the market’s volume: average trading volume is down by about one-third from three years ago.
The market signaled a long-term buy in the spring of 2009. But a buy signal was no match against the anxiety that took hold as the market plummeted. So for many investors, the gains of the last three years went unrealized. Many have been significantly underinvested during this bull market. But human nature is a powerful force, one that can easily overpower logic, reason…and obvious market trends.