The long-term trend of the stock market is up. Since 1928, the U.S. stock market is up 9.8% per year. There has never been a 20-year period of negative returns in the stock market.
But why is this the case? Why do stocks go up over the long-term?
The main reason the stock market goes up over time is because the economy grows, and corporations earn more money. If you own stocks, you earn a piece of that growth. It is a bet on the future being better than today.
Having said all that, the unfortunate side-effect of long-term returns is stocks are risky in the short term. No one can predict what can happen in the next year. The stock market is driven by a combination of earnings, trends, greed, fear, opinions, geopolitical events and much more.
When you invest in the stock market you don’t simply get 7-10% year in and year out. You get some combination of large gains followed by losses.
While the stock market has generated positive annual returns long-term, it’s also seen an average drawdown (decline from its high) of 14% during those years.
Here’s a look at the history of bear markets and how long it took to reclaim previous levels.
Bear market: When prices decline by 20%, often accompanied by an economic recession and high unemployment
Historical comparisons can’t tell us exactly what will happen, but they can help put things in perspective in terms of what previous bear markets looked like.
In hindsight, every bear market was a buying opportunity. But every time you are living through market declines it feels like it will never end.
What if you waited for recessions to end before investing? Like most economic data, the National Bureau of Economic research doesn’t tell us we’re in a recession until it’s already started. Using lagging indicators to predict a market that is forward looking is not a good idea.
For example, in 2020 the stock market rebounded 44% from the lows by time it was announced the recession had ended.
Getting out of stocks before declines and getting back in when the coast is clear is impossible.
Successfully navigating a bear market requires patience and good handle on your time horizon and goals. Having a financial plan is important because it can help quantify if a bear market is a buying opportunity or not based on your situation. Going all in or out of the market is never a good idea.
If you have any questions on your financial plan or need help getting started, please don’t hesitate to reach out.
Sources and Disclaimers:
Bear market: Generally defined as a decline of 20% or more from all-time highs. The market is 16% from all-time highs as of 5/13/22.
Stock market represented by the S&P 500 index
Annual Returns of 9.8% from Stern.nyu.edu
Drawdown from JP Morgan Guide to the Markets
Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.
Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss. This information is not intended to be a substitute for specific individualized tax advice. The Standard & Poor’s Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.