More Ups Than Downs

by: Richard A. Anderson

After a long stretch of relatively calm and steady stock market gains, volatility has reared its ugly head over the past four weeks. Last week we detailed how interest rates have contributed to the recent stock market slump. While interest rates may be the driving force behind the quick and dramatic drop in stock prices, there are other factors at play. Trade tensions between the U.S. and its global trade partners are running high. There is uncertainty around the upcoming midterm elections. There is nervousness as companies are beginning to announce third quarter earnings. Housing sales are starting to slow. Geopolitical pressures are mounting in light of the murder of Jamal Khashoggi in Saudi Arabia. All of these issues have played a role in the recent market volatility that has seen the S&P 500 decline in 15 of the 19 trading days in October.

Taking a step back and putting the recent stock declines in perspective, 26 trading sessions ago the S&P 500 hit a new all-time high. Since then, the S&P 500 has shed 9.60%. In the past few weeks, the S&P 500 has given back its gains from earlier in the year and sits 0.56% below where we started the year.

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Adding even more perspective, from 1950 through Friday’s close, the average daily return for the S&P 500 was 0.03%. The average return during days when the S&P 500 was up was +0.65%. The average return during days when the S&P 500 was down was -0.66%. Over this near 68-year time period the chances of the S&P 500 finishing the day up or down was a little better than a coin flip. The S&P 500 rose 53% of the time, fell 46% of the time, and was flat 1% of the time. However, over this time period there were 1,147 more up days than down days, which contributed to a cumulative price return of 15,859% (price return does not include dividends).

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Furthermore, going back to 1980 the average intra-year decline for the S&P 500 is 13.8%. Despite this, the price return for the S&P 500 was positive in 29 of the 38 calendar years. As I previously mentioned we are only 9.60% lower than this year’s peak. Earlier this year we experienced a bigger decline, when the S&P 500 fell 11.8% from January 26th to February 9th. We may be jaded because the largest intra-year decline last year was only 3%.

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All of this perspective points to the fact that market declines are the reason stock investors are rewarded with long-term positive returns. If there was no risk, there would be no reward. Yet, we know keeping a long-term view is easier said than done. After all, the long term is just a series of short terms. And the most recent short term has been especially challenging when we see scary red numbers on our TVs and smartphones every day.

CNBC has aired two separate special reports on the market sell-offs in the past few weeks and the financial media would have you believe the bleeding isn’t going to stop anytime soon. Anyone who tells you they know what’s going to happen in the markets in the coming year, let alone the next few days or weeks, is full of boloney. Only time will tell whether this recent spell of volatility is the start of the next bear market or a blip on the radar as this bull market continues to ride higher. However, history suggests trying to call a market top is a surefire way to miss out on future returns because all turning points appear clear and apparent in hindsight.