Following two years of almost straight-up returns from the stock market, the behavior of stocks in early 2022 has caused many people to wonder not only if the party has ended but also whether they are going to have to “pay the price” for what might have been an exuberant blow-off to a strong decade of equity returns, at least in the U.S.
Many market commentaries are now being written about bear markets to come and the more apocalyptic might include comments about the “end of (up-market) days.” These commentaries are focused on what the market will do, but none of them are, or can be, comments on how the stock market fits into and affects your unique investment goals and objectives. When markets are turbulent, it may be tempting to jump off the boat to reach a safe shore but staying on the boat until it can reach calmer waters and possibly sail to greater destinations may make far more sense.
As investors should know (agreeing that the last 10 years could have well dulled people’s memories), downturns in the market are inevitable and happen from time to time, so it’s critical to understand why staying true to long-term goals can help investors stay protected. Much of investor selling during a market correction is based on emotion rather than on what may be most beneficial in the long run. In this article, we share how the past shows us that staying invested is likely the safest option and can mean a faster path to recouping losses and growing assets following downturns or periods of extreme swings in the market, also known as volatility.
Lessons from History
To illustrate this point, the reward pattern for long-term investing isn’t a straight line. It comes with pullbacks and corrections as a normal part of market behavior, as shown in Exhibit 1, which shows yearly variances in the S&P 500® Index going back to 1980. When looking at returns over the longer term, it’s impressive how non-linear they can be. But when you look at the bigger picture, it becomes clear that historically the market has recovered from intra-year declines and provided positive returns for investors over the long term.
Despite Average Intra-Year Drops of 14.4%, Annual Returns Were Positive in 31 out of 41 Years
S&P 500 Intra-Year Declines vs. Calendar Year Returns
Source: FactSet, JP Morgan, and S&P U.S. Daily data as of December 31, 1979 to December 31, 2020. Returns above are in U.S. dollars and calculated based on the S&P 500 Price Return Index. It is not possible to invest in an index. The S&P 500 Index measures the broad U.S. stock market. Maximum drawdown is the largest drawdown (peak-to-trough) within a calendar year. Past performance is no guarantee of future results.
Keeping this in mind can help investors stay committed to their investing goals and not react in ways that could negatively impact their investments. For example, stock rallies have tended to occur in short bursts, so missing out on a few days of being invested in the market could mean missing out on substantial gains. If you stop investing during the ups and downs along the way, you end up missing out on the small number of the highest returns over any given interval. The difference is striking, as can be observed in Exhibit 2.
S&P 500 Growth of $1,000
Trying to maneuver investments with every nuance, such as market timing – or buying before the market heads upward and selling before a downturn – does not make sense, in our view. “Buy low and sell high” is a familiar refrain, but during uncertain markets, attempting to time the market is hazardous at best. Many investors, academics, and financial professionals, including those at SBH, believe it is impossible to effectively and consistently time the market. Rather, we believe that staying true to long-term goals is a better way to capture both short- and long-term gains.
A Stock Picker’s Edge?
Another important aspect to remember is even in the most turbulent markets, not all industries and companies underperform. There are opportunities for the active manager, who understands the fundamentals of specific companies, to make informed decisions rather than blindly following the whims of the market. Never forget that it is not a “stock market”; it is a “market of stocks.” A market downturn can even represent a strong stock-picking and buying opportunity for healthy companies that are likely to bounce back once a crisis subsides. Managers can also research what’s happening within each sector based on the specific nuances of each crisis. COVID-19, for example, had a negative effect on the travel, transport, and leisure industries; however, there were bright spots including businesses with strong balance sheets and franchises that benefited from the need for spending on testing and tools to fight COVID, in addition to businesses that were able to benefit from a stay-at-home work environment such as streaming services and virtual communications
Staying True to Your Goals
In the end, nobody could have predicted a global pandemic or many of the other previous market downturn triggers. Other unanticipated events will certainly occur and investors need to be prepared. It can be far from easy to maintain positivity at the height of a market storm, but we can be comforted by remembering that the stock market has a strong history of recovery. Staying invested has shown to be the most effective way to recoup losses and to start growing capital, making a crisis a crucial time for investors to reaffirm their commitment to long-term goals.
To learn more about investing for the long term, our portfolio managers are happy to help. Reach us at email@example.com or (800) 836-4265.
Last updated January 2022. This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for accounting, legal, tax, or investment advice. The factual statements herein have been taken from sources we believe to be reliable, but such statements are made without any representation as to accuracy or completeness. These materials are subject to change, completion, or amendment from time to time without notice, and Segall Bryant & Hamill is not under any obligation to keep you advised of such changes. This document and its contents are proprietary to Segall Bryant & Hamill and no part of this document or its subject matter should be reproduced, disseminated, or disclosed without the written consent of Segall Bryant & Hamill. Any unauthorized use is prohibited.