Up Down and All Around

By Paul Morrone, CFP®, CPA/PFS, MSA

It would be foolish to assume that anyone likes the rough ride of the stock market. It is wildly deemed to be a necessary evil that long-term investors must endure over time to work toward growing their wealth, preserve purchasing power to combat inflation (a key topic these days), and generate income in their retirement years. It’s not easy to be an investor either. It involves decades of discipline, systematic saving and, to some degree, blind trust in the potential growth of financial markets. When things go awry, it makes it even more difficult to keep that faith and maintain perspective on why we deal with such uncomfortable moments.

Perspective is a funny thing, because, in the wrong context, it can be viewed as dismissive or even condescending. It would be ignorant to take a hard stance that volatility, and its underlying causes, don’t pose real risks. They do, which is why markets react in the way they do – by going down, sometimes quickly. Markets are constantly processing and reacting to information in real time. In many cases, those reactions may be over-reactions. Remember, an investment you make is an investment in the future, not the past, which is why it takes time for markets to accurately interpret the millions of data points they are forced to process each day. The impossible question to answer is always the one that everyone wants the answer to. When will it things calm down!?

I’m the first to admit that I have no idea. It could be tomorrow, or next month. Or the worst may already be behind us. Without the benefit of hindsight, we just don’t know. To that point, rewind back to the darkest point of 2020, Monday March 16th, 2020, to be exact. Major cities had just locked down, here in CT were told to stay home effective the following Monday. The DOW, S&P 500 and Nasdaq all dropped over 12% that day. Mind you, this occurred after markets had already pulled back nearly 20%. Talk about adding insult to injury. The pace at which markets contracted that month have set a precedent to which we will benchmark all future pullbacks. What is more impressive about the March 2020 meltdown, however, was how quickly things recovered. Some of the worst days in history were quickly followed by some of the best. 

The saying “time heals all wounds” is probably overused, but certainly applicable here. Cinco de Mayo 2022 was a party for market bears this year, with most major indices dropping more than 3% across the globe. Certainly not the pain we felt in March 2020, but painful, nonetheless. Below are four charts that I’ve posted to serve as a reminder of what we have endured together, and how discipline has paid off over time. You can see that the short-term charts (1 day, year-to-date) aren’t that pretty. However, as the window of time is stretched to 1-year, negative returns are far more muted. While most would like to see positive performance over a 1-year period, statistically, we have only realized it about 70% of the time(Source: Capital Group). These past 12 months represented the unfortunate 30% that we all want to forget. Stretching our window out over 5 years, however, tells a far different tale. Had I extended the window to 10 or 20 years, the numbers would be even more staggering. The S&P 500 rose significantly over that time, in spite of the several meltdowns that occurred during that period. 

In 2018, the S&P plummeted 20% and famously bottomed on Christmas Eve before rocketing back up in early 2019. Then there was the COVID meltdown in 2020, the quickest and most severe in history. All these events hurt and made many question their investment strategy. Some wondered if they could ‘ride the wave one more time’ or if it was time to get out for good. The numbers speak for themselves. 

Source: CNN Money 5/5/2022

_{The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All investing involves risk including the possible loss of principal. No strategy assures success or protects against loss.
The content is developed from sources believed to be providing accurate information.
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