July provided a solid reprieve after a difficult first half of 2022, with investors buying the dip. The S&P 500 Index posting its strongest return since November 2020, up 9.2%.1 Negative earnings guidance earlier in the year was strongly priced in. Recent, better-than-expected guidance from management has been viewed positively by investors, fueling a buy-the-dip mentality. Lying below the reprieve of positive returns were various headlines which invited further speculation and concern. A second consecutive contraction in GDP led to further questions regarding whether we are in a technical recession.
Corrections, Bear Markets and Recessions are Normal Things
There is nothing enjoyable about market corrections and/or recessions. They create fear, anxiety and uncertainty, potentially requiring a change in plans - like reduced spending in retirement or an unanticipated job search. Perspective can go a long way to successfully navigating these periods, uncomfortable and difficult as they may be. Outlined below is some enduring wisdom we can share having invested through bear markets and as students of history.
Frequency of Market Events Since 1950
Source: Capital Group. 1) National Bureau of Economic Research as May 2022
Recessions and corrections are points in time, while wealth-creating bull markets happen over time.
Markets have been incredible creators of wealth over time. Below we demonstrate not just the frequency of bull versus bear markets, but the disproportionate outcomes skewed towards the positive. The total return of bull markets over time has been nearly 8x the drawdown of bear markets and have persisted over 5x as long.
It is also worth noting that these returns happened over a period in which the U.S. was engaged in four wars (Korean, Vietnam, Persian Gulf and the War on Terror), a Presidential assassination, Civil Rights riots, stagflation, higher interest rates, lower interest rates, multiple recessions, etc. The resilience of wealth creation builds context for the period in which we live now and how it may feel volatile or unprecedented. It is not unprecedented, and this too shall pass.
Bull markets happen over time. Bear markets are points in time.
Source: Capital Group, RIMES, Standard & Poor’s. As of December 31, 2018. Bear markets are peak-to-trough price declines of 20% or more in the S&p 500.
Bull markets are all other periods. Returns are shown on a logarithmic scale.
Recession Obsession: Don’t Focus too much on the Wrong Thing
In periods of market volatility, investors’ gazes often turn to judging whether a recession will occur. Recession headlines may be a red herring when it comes to investing. Markets attempt to look forward to predict the future while economic data is inherently backward looking. On average since 1950, stock markets have peaked seven months prior to an economic peak and bottomed three months before the economy began growing again. While a recession may help provide context around the potential depth or length of a pullback, it may not be the most helpful focus point for market outcomes.
Average S&P 500 Return vs Industrial Production
Source: Capital Group. 1950 - 2019
In times of plenty, investors often lose sight of the building blocks of a well-allocated portfolio. Fear of missing out when markets run up is a powerful motivator. We believe the following are elements of a more optimal approach for long-term success:
- Stay Diversified – Diversification is an admittance of not knowing what the future holds. It also helps avoid acting in absolutes like “value will never come back” or “fixed income is dead.” The discipline of diversification often leads to a more robust approach that can help weather the inevitable storm markets create.
- Stick to the Plan –
- Conceive your plan with realistic expectations on risk you can handle and returns you can achieve.
- When you have a plan, do not change it in the middle of the game. Have faith in the process and recognize the plan was built knowing recessions and bear markets would happen.
- Long-Term is Where the Real Money is Made – This comment cuts at the heart of many truths in investing. Albert Einstein once quipped that compounding is the eighth wonder of the world. Short-term expectations often lead to ‘flavor of the day’ investing, which rarely stands the test of time. No strategy works all the time, especially when passing judgment in a short window of time. Stay long-term and let the markets work for you, rather than you working against them.