Should Investors Try to Anticipate Market Declines? Market Corrections, Recoveries and Long-term Returns By Lon Birnholz
With the media and investment commentators’ constant focus on predicting the next market downturn, it is easy to lose the proper long-term perspective, to get spooked out of the market unnecessarily, or to try to sell in advance of an “expected pullback”. The main problems with this thinking are that the feared pullback might occur after the market has made a further significant advance, or that the investor is slow to return to the market, waiting for an “all-clear” sign, thereby potentially missing an important part of the next move upward. The objective for many investors is to find a stock/bond mix that participates in good markets, provides a desired level of protection during market declines, and allows one to sleep at night. The most difficult part of succeeding is sticking with the plan, especially when the environment seems ripe for a sell-off. To put market selloffs in perspective, we recently studied a near three-decade period of market pullbacks, corrections, and bear markets, the subsequent time to recover back to the previous high, and the total returns through the stock market’s ups and downs. Over the study period from Dec. 31, 1992 – June 30, 2021, using the S&P 500 ETF as a proxy for the stock market, we found there were 34 market pullbacks of 5 percent or
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more, an average of 1.2 pullbacks per year. Twenty-one were in the 5-10 percent range, 10 were in the 10-20 percent range, and only three were over 20 percent. The time between corrections varied, as did the magnitude of the decline. Overall, the average pullback lasted for 2.9 months and took 4.8 months to return to the previous high. The average pullback was -12.9 percent. Each decline that occurred during the study period was followed by a rebound, and the market moved to new highs thereafter. Market volatility, corrections, and bear markets are part-and-parcel of equity investing. Even including these negative periods, however, investing in stocks has resulted in attractive returns over time. For the full 28½ years studied, stocks returned 1,572 percent cumulatively or 10.4 percent compounded annually, an attractive rate of return. Three-quarters of the time, stock investors achieved 10-year annualized returns of at least 6 percent. And only 10 percent of time were 10-year annualized returns -0.1 percent or worse.
Patience will be rewarded The key takeaway is that over time, stocks have provided favorable returns, including the downturns. While stocks have and will likely continue to earn favorable returns over time, returns for any future
ON THE LEVEL:
Lon Birnholz is senior managing director for Matrix Asset Advisors, overseeing fixed income portfolio management and heads business development and client services activities. lon@matrixassetadvisors.com
212-486-2004
period are entirely unpredictable. Sell-offs can occur at any time and are difficult, if not impossible, to predict, especially with any level of consistency. Of course, pullbacks can be scary and very uncomfortable, but they historically have been followed by equally robust recovery. Most of the rebounds have occurred at a surprisingly fast pace and started when least expected. We believe the best course of action is to set an appropriate asset allocation and stay with it through the ups, downs, and subsequent ups of the market. Market downturns have proven to be temporary, with each correction returning to, and then exceeding, its previous high. A skilled and experienced investment adviser can be a trusted partner to you or your business, helping provide data, knowledge, and support in uncertain times, and aren’t times always uncertain?
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