Summer has been anything but calm on Wall Street. Volatility is back in a big way and we haven’t experienced a downturn in equity markets this sharp since the financial crisis more than six years ago. While no one likes losing money in the stock market, we feel the recent downturn is a good thing and here’s why.
The S&P 500 is up more than 150% since the lows of the recession, major U.S. stocks have grown in value without much of an interruption the past several years. While personal and corporate balance sheets are in much better condition there is still room for improvement. Since the recovery began in the second half of 2009 people have been calling for a “double dip” or “correction” in the markets. Fortunately we avoided a double dip but recently we did experience a correction in equity markets. Technically a correction is when an index declines by more than 10% from its high, usually with no fundamental reason for doing so. By analyzing stock index values from May of this year through September we see that the major indexes have indeed declined from their highs by at least that amount.
If you constantly say the stock market is going to drop, eventually you’ll be correct. That’s obvious because the stock market is always moving up and down in varying cycles, the timing of which no one knows for sure. Now that the correction has happened we believe investors will shift focus from trying to time the drop and instead look forward to long term fundamentals. We do see challenges ahead for the global economy impacted most by China, Brazil and India. In addition the world continues to watch the Fed’s every move, guessing when they’ll raise interest rates. While we would like to see rates increase in the near term we wouldn’t be surprised if they remain static through the end of 2015. Most notably we recognize that businesses and individuals in the U.S. are much better off today than they were closing out the previous decade.
Remember that historically the ups of the market have outweighed the downs. If you believe it’s human nature to strive to do better for one’s self and family then you would agree that people will naturally persevere and find a way to continue moving forward. Fact is we’re still driving cars, buying cell phones and putting food on the table, fundamentally not much has changed in our daily lives. For long term investors the idea behind sticking to an asset allocation strategy should provide encouragement. According to Ibbotson research, since 1926 there has never been a 20-year stretch in which a diversified portfolio invested in large U.S. firms has had a negative inflation-adjusted total return.
These recent ups & downs compare to others. On August 24, the S&P 500 lost 3.2% and was down more than 4% during the course of the day. That was bothersome for most investors, but not devastating. This was actually the fifty-fifth time since 1983 in which the S&P 500 index dropped 3.5% or more during a single trading session.
How has the S&P recovered from days like these? Looking at each 12-month period after the preceding 54 such trading days there were 45 year-over-year advances and only 9 year-over-year retreats. On average the S&P 500 retreated 7.7% over those 9 declining instances. However the average increase of the S&P 500 was a remarkable 27.6% during the 45 annual ascents. While history isn’t an indication of future results, it does seem that the S&P 500 has recovered well from the majority of its large single-day declines.
After a long steady ascent it’s easy to become lulled into thinking that the market only goes up. We all know differently, but even so it can be a rude awakening when our account statements begin to look like a roller coaster ride. The best advice is to be patient and resist the temptation to let emotion take over. As the late Paul Harvey said, “In times like these, it helps to recall that there have always been times like these.”