This year may well see further stock market declines, but history suggests investors can look forward to brighter times.
At the recent market bottom, less than 15 per cent of S&P 500 stocks were trading above their 200-day moving average. The equivalent figure (8 per cent) was even worse for the tech-heavy Nasdaq index.
Ritholtz Wealth Management’s Michael Batnick notes that, since 1996, when less than 10 per cent of Nasdaq stocks were above this juncture, the index was never lower a year later. The average return was 35 per cent. As for the S&P 500, there have been 219 times since 1987 when less than 15 per cent of stocks were above their 200-day average. On all but two occasions (September 2001 and October 2008), stocks were higher a year later.
Similarly, Batnick’s colleague, Ben Carlson, notes that this is the ninth time since 1950 that the S&P 500 has fallen at least 25 per cent. The bad news: further near-term declines are common and often significant. The good news: on all but one occasion, stocks were higher a year later. Stocks gained over every three-, five- and 10-year period. Gains were well above average across every time frame.
Stocks may well fall further, but Carlson is right to note investors with longer horizons should view downturns “as an opportunity, not a cataclysmic event”.
