Given the recent volatility in the financial markets, we thought it timely to add some perspective to the pullback investors are experiencing in both stocks and bonds. That said, we certainly recognize that these are stressful times and suggest perhaps repositioning your portfolio to make certain you are well positioned when we emerge from this malaise.
On average, stocks drop more than ten percent every other year and experience a drop of more than twenty percent every three to four years. Having been in this business for a combined half century, we realize that none are easy and know that every pullback feels like it is “different this time.”
Since the market bottomed toward the end of the Great Recession around February 28, 2009, excluding dividends, the S&P 500 has risen at an average of 13.56% per year while nonetheless experiencing six pullbacks of at least ten percent. These include one that began April 23, 2010 during which the S&P 500 dropped 15.99%; one that began on April 29, 2011 during which the S&P 500 fell 19.39%; November 3, 2015 where there was a decline of 13.31%; January 26, 2018 began a correction of 10.13%; September 20, 2018 during which the S&P 500 fell 19.78% and the COVID induced bear market that began on January 19, 2020 and ended 23 trading days later on March 23, 2020 during which the S&P 500 fell 33.92. There it is six corrections over the past thirteen years or once every 2¼ years or so. We may be wrong, but it does look like we were due for a correction.
Don’t forget that EVERY correction or bear market in the history of the United States has been followed by subsequent new record highs. Let us repeat, EVERY correction or bear market in the history of the United States has been followed by subsequent new record highs. You may say it is different this time. Historically, that would be unprecedented.
What leads the market down during corrective phases will not necessarily lead the ensuing recovery.
Both stocks and bonds have corrected (dropped more than ten percent) which is a deviation from recent history. This is the result of the recent rise in interest rates. It is often said that the cure for high interest rates is higher interest rates. It will not be different this time.
Inflation will remain high. However, the rate of month/month change is peaking.
Becoming a successful investor requires one to recognize that there will be losses in your portfolio and regrets. That is a fact of life. Investors must fight the tendency to sell into weakness. Think long-term. Historically, as noted above, the stock market has a 100% chance to eventually make new highs.
The stock market is a discounting mechanism. For example, the market bottomed on March 23, 2020 just as the economic impact of the COVID pandemic was spreading across the world. By the time you feel “comfortable” buying, the market will have already begun to rebound. Historically, it pays to be uncomfortable.
Despite the above, expect more volatility throughout the remainder of the spring and most likely well into summer. In addition, unlike prior corrections, we expect that the recovery will be more in the shape of a “U” rather than a V.” However, we also believe that patient investors will be well rewarded within the next twelve months.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.