The Ups and Downs of the Stock Market
By: Mr. Steven Karsh
The U.S. stock market at the beginning of 2002 seemed like a roller coaster ride at times; big ups, followed by big downs. Despite erratic market movements, often referred to as volatility, long-term investors have been rewarded by staying patient and riding out the volatility. The most recent example happened just over two years ago when COVID-19 caused the global economy to essentially shut down. The S&P 500 experienced its fastest 30% decline in history, taking only 30 days!
Investors who remained calm and added money to stocks to reach their target allocations reaped big rewards when the market rebounded to new highs in just over four months. In fact, from the low on March 18, 2020, to December 31, 2021, the U.S. stock market more than doubled, returning an astonishing 106% in just over 21 months. Even more astounding is that after the stock market was down over 50% during the Global Financial Crisis (GFC) in late 2008 and early 2009, the market rose over 580% from the 2009 lows through December 2021! Even if you include the 57% decline during the GFC, the market is still up over 180% from October 2007 through January 2022.
The chart below from JP Morgan shows that intra-year declines in stocks are normal. Since 1980 stocks have fallen an average of about 14% in any given year.
Another chart shows how taking advantage of stock market dips by adding to equities can lead to significantly better long-term performance than a buy-and hold approach. The worst approach was to panic and take some money out of the market after prices had fallen.
Keeping in mind that past performance is no guarantee of future returns, history has demonstrated that large dips have been buying opportunities, not reasons to become more risk-averse. Market rebounds have rewarded patient investors and those who keep their focus on the long-term.
The most pressing question during a downturn is why? Many factors can cause a down market, depending on the economic environment. Many believe the recent volatility has been caused by the sharp rise in inflation and the Federal Reserve’s plans to reduce it, ranging from increasing interest rates to quantitative tightening (taking liquidity out of the market). Other factors for the recent downturn may include geopolitical events such as Russia/Ukraine and China/Taiwan. And we can’t forget another ongoing variable, the persistence of COVID.
Regardless of the reasons for pullbacks in stocks, if you have a long-term time horizon, the ups and downs of the market shouldn’t cause you to panic and make emotional investment decisions. Time and again, the market has trended upward and adding to stocks when they are down can be beneficial for your long-term investment results.
Mr. Karsh is a Principal at Innovest Portfolio Solutions, a Denver-based independent registered investment advisor.