By Kevin Theissen
As recent economic news and conditions have focused on inflation, market downturns, oil prices, conflict and more, it is sometimes good to step back and look at the big picture. The last decade has given us one of the greatest bull markets in history. It also included market downturns. We came very close to entering a bear market in 2011 and 2018, which is typically defined as a 20% pullback in the S&P 500 Index. From its closing peak of nearly 4,800 on Jan. 3 this year, the S&P 500’s most recent closing bottom of approximately 3,900 in mid-May showed a downturn of approximately 18%. An end-of-May rally helped minimize losses for the month.
There has been a shift in the economic fundamentals over the last decade. During the 2010s, interest rates were extremely low; the Fed was buying treasury bonds during the early part of the decade (quantitative easing or QE); inflation was low, and the economy was expanding at a modest pace. That economic expansion led to a rise in corporate profits. When the Fed began to raise rates, the shift in policy was gradual. These conditions helped to create an extended strong movement for stocks.
Yahoo Finance showed that on Dec. 31, 2009, the S&P 500 closed at 1,115. Ten years later, the S&P 500 had nearly tripled to 3,231. On May 31, it closed at 4,132. On Dec. 31, 2009, the Dow Jones Industrial Average closed at 10,428 and on May 31, the Dow closed at 32,990.
Currently, even though the economy is growing, and corporate profits were proven strong with a positive first quarter profit season, stocks continued to slide downward. Some of this seems to be due to Fed rate hikes and an aggressive policy to rein in inflation which has increased economic uncertainty and angst among investors. This is on top of the seemingly excessive fiscal stimulus that encouraged high consumer buying and low unemployment, and supply chain woes that limited the availability of many goods. Market volatility has not been helped by Russia’s invasion of Ukraine and recent lockdowns in China. All of this has led to recession talk which adds to the uncertainty.
Market downturns can be fast and uncomfortable, and periods of up markets typically have been slower and longer. Schwab analyzed S&P 500 data going back to the mid 1960s and found that the average bear market lasted 446 days with the average decline of 38.4%. However, Bull markets averaged 2,069 days and returned an average of 209.2%.
So, if you are a long-term investor, which most people are, stick to your investment plan. Markets don’t rise without corrections. Be careful about making investment decisions that are based on emotion. Successful investors are disciplined. They avoid letting excess optimism in up markets or pessimism in downturns influence your decisions. It’s not always easy but stick to long-term thinking during these times.
Kevin Theissen is the owner and financial advisor of HWC Financial in Ludlow.
