It’s been seven years and four months since the S&P 500 bottomed on March 9, 2009 at 676.1 Since that time we’ve hit multiple new highs, even settling in at 2119 on June 8, which was the all-time high.2 What’s interesting is since early 2009 we’ve actually had a fairly stable and steady rise to this most recent peak. This was all in the midst of investors calling for a double dip recession where we would surely fall back down, or at least close to the lows experienced in the depths of the crisis. I even have a number of colleagues who have been on the sidelines since 2009 holding an exorbitant amount of cash who have, unfortunately, missed out on one of the greatest bull markets in the past hundred years. Given the severity of the financial crisis and investor pessimism extending to today, it’s rather shocking to see how little actual volatility, or ups and downs, we’ve experienced in the past seven years. Even today, with so much geopolitical uncertainty and unparalleled global central bank stimulus, the VIX, which is a volatility index or “fear gauge” of the markets, stands at around 12; the long-term average is about 20.3 This is signaling that investors remain complacent and are not fearful of a minor stock market correction.
People still seem to be so shell-shocked by the events of 2008, and maybe to a lesser extent the dismal start to the year, that they feel like at any minute there could be another huge sell off in the market. This hardly ever happens. Rarely do investors wake up one day, flip on a news channel, and see that stocks are down 20 percent. In fact, since 1928 there have been only 17 instances where the market (as measured by the S&P 500) has declined by more than 25 percent from peak to trough – and seven of those happened in and around the Great Depression.4 A 25 percent decline seems like a lot, and it is a lot, but recall that after every single one of those declines the market has subsequently rebounded to hit a new all-time high. That being said, it certainly would be nice to be out of the market during those drawdowns, or at least participate much less than the full market decline.
In general, the economic cycle is a main driver of stock market returns; it typically doesn’t matter if market valuations are very low if we’re in a recession. Where investors can get hurt is investing in periods when stock market valuations are high just as the economy begins to roll over. Nevertheless, it’s obviously extremely hard to time when the next recession will hit and it can be harmful to portfolios in trying to predict the next one. As such, being out of the market for an extended period of time usually never works to your benefit. A more practical approach would be to position your portfolio, in times when you are nervous about a correction, to be able to weather the downturn more aptly than you otherwise would have.
Lastly, always remember that 10 percent corrections are common when investing over the long term; in fact, they happen about once a year on average.5 At Fragasso, we typically use these downturns to rebalance your portfolio into out-of-favor asset classes where long-term fundamentals still look positive. Emotions can cause investors to lose sight of these facts but creating a financial plan when emotions are in check, and sticking to that plan when the markets are volatile, can prove fruitful in the years ahead.
Past performance is no guarantee of future results. Investing involves risk including possible loss of principal.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The indices mentioned are unmanaged and cannot be invested into directly.
1 Thomson Reuters – Datastream
2 Thomson Reuters – Datastream
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