As of May 17th, the S&P 500 is down 14% year to date. Given the apparent negative economic outlook, many investors are concerned about their investments and what they should do. However, before descending down a worry spiral, pause and ask yourself: “Is this normal? Have I seen this before?”
During the 94 calendar years from 1928 to 2021, the US stock market had intra-year, double-digit declines 59 times. That’s almost two of every three years that the US Market experiences a double-digit decline. Yes, two-thirds of the time. So, we can conclude that a drop like the one we are currently seeing is a common event in the stock market. Not only common but good! Why? The reason investors are compensated with positive returns over time from investing in stocks, instead of cash or bonds, is because of the occasional period of negative returns. If there was no risk, investors would not get any reward for bearing that risk. Said differently, market downturns are features, not bugs.
Let’s dive deeper into those 59 years that had double-digit declines. Did the market recover or stay negative at the end of those years? In 58% of those 59 years, the market ended the year with a positive annual return despite the double-digit drop. 40% of those 59 years finished with a double-digit positive return!
What is the economic intuition behind why markets recover more often than not? Markets do a great job of factoring in both positive and negative news about companies and the economic outlook. Investors only invest in the market at current prices if they expect to earn a positive return. If everyone knew that the market would go down, no one would buy stocks at their current prices. Prices would simply fall until they hit a level that gave an investor a commensurate return for the risk they are willing to take. Today’s market prices reflect the current economic outlook. From here, markets might go up or down, but on average, market returns are expected to be positive over time.
That is precisely why we recommend that our clients stick with their well-thought-out investment plans rather than panic out of the market. The risks you may be worried about are already factored into stock prices. You are not alone in your fears, but that doesn’t mean you have to act on them. By selling now, you will miss out on the future positive expected return of stocks. We just can’t predict when those positive returns will happen.
When you look at nearly a century of bull and bear markets, the good times have outshined the bad. While we don’t know how long a bear market will last, staying invested ensures that you capture the bull markets when they do arrive again.
