Economic uncertainty seems to be on most people’s minds at the moment. Many are uneasy about the ongoing declines in the stock market and are wondering what’s happening with the money they’ve invested. And for good reason.
As I’m writing this, the S&P 500 (an index made up of the largest 500 stocks in the U.S.) is down approximately 16% since the beginning of the year. That’s the second-worst start to a calendar year in history.
Now, the average drawdown (price drop from peak to trough) in the S&P 500 over the course of a calendar year is 13.6% so we’re not far off from what typically happens most years. But depending on what you’re invested in, it can feel a lot worse.
While diversified index investors are experiencing a fairly normal correction, tech investors are getting crushed. Many of the popular stocks over the past few years are giving back their returns.
The Nasdaq (the 100 largest U.S. stocks) just had its worst month since 2008 and is down 25% this year. Of the 20 biggest companies in the U.S., there are just six stocks with positive returns in 2022. Amazon is down 36%. Netflix is down 70%. Nvidia is down 41%. Tesla is down 33%.
As someone recently told me, “It’s been a tough year.” Indeed it has. Stocks haven’t given us a lot to celebrate about to start this year: however, I want to take a brief look at how the stock market has historically responded coming out of big declines like the one we’re experiencing now.
In 59 of the last 94 years, the U.S. stock market has had a double-digit market correction. Of those 59 years with a correction, the market finished the year with positive returns 58% of the time. And nearly 40% of the time the market finished the year with double-digit gains!
The following chart illustrates the S&P 500’s biggest intra-year decline (black dot) and the subsequent annual return (green). The pink line is about where we stand this year:
Just in 2020, the S&P 500 declined a whopping 34% and still finished the year up 18% from where it began.
Given the historical precedent, there could be a pretty big opportunity here. Since 1950, in the days when the market has closed down 15% or more from its high, it’s posted positive 12-month returns 76% of the time after that. The average 12-month return is 14%.
I realize that dealing with market downturns has more to do with emotions than numbers. As Peter Lynch once said:
“In the stock market, the most important organ is the stomach. It’s not the brain.”
There may be some who are thinking to themselves, “That data is all good and well, but this time it’s different because there’s a war happening, bonds are also getting crushed, inflation isn’t slowing down, home prices are skyrocketing, and the Fed is tightening the money supply.”
Which is true. But remember that all of those market corrections in the past happened for a reason. Bad stuff was happening then too. People were pessimistic then too. Things always seem doom and gloom until they don’t and the market makes a recovery.
Who knows how bad this could get or how long it will last, but for long-term investors periods of discomfort are necessary in order to achieve high returns over time.
During times of turbulence such as these, I find it helpful to zoom out and look at the big picture. Here are trailing S&P 500 returns:
One year: -4%
3 years: +38%
5 years: +67%
10 years: +205%
Helps to put things into perspective, doesn’t it?
Thanks for reading!