As we all know, the performance of the stock market has been pretty bad lately. The S&P 500 was down about 10% last year and down another 12% in the first quarter of this year. In times like these, it’s particularly important to keep the proper perspective in order to avoid making significant missteps.
This kind of performance is rather unusual. In fact, when we look at the record, over the last 40 years the market (as measured by the S&P 500 index) has had a negative return for the full year only 11 times. And over the same 40-year period there have only been 9 (out of 160) times that the market has had a loss of 10% or more during a quarter. So, clearly, what we have seen recently is unusual.
It might also be useful to see what happened in previous periods when the market behaved similarly. In the chart below, each of the quarterly periods where the market had a negative return of 10% or more is identified in the left-most column. In the next column to the right is the percent return for that quarter. In the next two columns you can see where the market was exactly one year later.
As you can see, there was only one quarterly period where the loss was greater than 10% and the market didn’t follow with a gain one year later. In all but two years it was a substantial gain.
Investor’s Business Daily has another way of looking at how fast markets turn. Their chart illustrates that if you missed being in the market on the 30 days which had the highest gains over the last 10 years, your gain would have been reduced from 14.8% to just 4.3%.
And, finally, we should note that, as of April 23, the NASDAQ index has gained 33% over just the last 11 trading sessions. Wow!!
So, as we can clearly see, markets typically move swiftly and decisively in both directions, and it is impossible to tell when a change in direction will occur. Trying to outguess what the market is going to do is hazardous to your investments, and investors who flee the markets or don’t practice sound diversification strategies will probably be disappointed. Staying fully invested is clearly the safest course of action and the best road to good returns.