The world is filled with uncertainty right now. The ongoing war in Ukraine is driving food and energy prices higher around the world, China’s lockdowns are compounding supply chain pressures, and the Fed’s aggressive stance to combat inflation has the potential to drive the US economy into recession. For investors this level of volatility can be difficult to bear, which is why we remind everyone to have a long-term plan and avoid the short-term noise.
During volatile times it can be tempting to selling out of the market and “wait it out”, but timing the market is difficult and requires being right twice – on the exit, and then re-entry; often leading to sitting on the sidelines too long. And the long-term impacts of missing just one good day per year can be devasting (see bullet five below). Instead, we suggest investors stick with their long-term plans, deploy excess liquidity opportunistically in markets like this, and remember that the world only ends once.
Below are five thoughts on the current market and economic environment.
1. Every bear market is different
Historically the average drawdown period for a bear market (since 1957) has been 322 days, and a median of 177 days.
The current drawdown (technically not a bear market which is defined as any time the S&P 500 falls by 20% or more) has lasted for 136 days and has been driven by fears over inflation, ripple effects of the ongoing supply chain disruption, and concerns over a consumer slowdown.
Compared to previous bear markets the current market drawdown pace appears relatively in-line from a duration perspective, despite what may feel like unprecedented volatility. Furthermore, it’s worth noting that most bear markets do not experience the magnitude of drawdown experienced in 2008/2009, but instead average -20%.
We caution inferring too much from previous bear markets, as the causes and underlying market conditions that create each environment are different. That said, based on the median drawdown duration of 177 days we think the market could start to stabilize near current levels in the coming weeks, especially if earnings stability persists (more on this topic below).
2. Historically the S&P 500 rallies sharply in the 12 months following a bear market
During volatile markets like this we remind investors that investing should always be done with a long-term perspective. Historically the market has rallied sharply off bear market bottoms, with an average return of nearly 40% in the 12 months following the trough.
For investors that can maintain a long-term perspective we continue to advocate deploying excess liquidity into risk assets, specifically US large-cap equities. While the market may go down further from current levels, over the next 12 months we think the risk/reward is justified for new capital being deployed.
3. S&P 500 earnings continue to grow, which suggests recession risk is limited
Since the start of 2022 S&P 500 future earnings (i.e. next twelve months earnings) estimates have continued to rise, even as the market has pulled back and inflationary concerns have mounted. While some companies may start to see margin pressures (e.g. retail) we think corporate earnings will continue to hold up given the strength of the consumer.
Bottom line: as long as earnings revision trends remain positive, we think the near-term risk of a recession is low.
4. The S&P 500 has never finished the year at its intrayear low
The S&P 500 experiences an average drawdown of 14% each year, but has never finished the year at its intrayear low (since 1957). As such, we view market drawdowns of over 10% as opportunities for investors to deploy excess liquidity opportunistically into risk assets across sectors and asset classes.
5. Staying invested matters
Timing the market requires being right twice – knowing when to exit and when to buy back in. For investors that try to time the market and fail, the long-term investment repercussions can be significant.
While volatility often spikes during teams of market unease, the same volatility that leads to steep declines also drives steep gains. Furthermore, the best days of a recovery are often clustered near the worst.
Staying invested matters. No one knows what the market will do tomorrow, next week or next month. But what we can learn from history is that missing the best day of the market each year can have drastic consequences on your overall investment gains.
ENDNOTES
Disclosures
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.