We hear you. You, like most investors today, are very concerned about market volatility and falling account values. Should I be selling to protect my retirement, you may ask?
You are not alone. Turbulent markets and geopolitical uncertainty can be stressful, and we can’t exactly predict when all this volatility will begin to moderate.
What I can say with some certainty is that it won’t last forever and that markets will begin to recover before the economy is flashing “all clear.” This is because stock markets tend to be “leading indicators” and move directionally anywhere between 6 to 12 months ahead of the overall economy.
The most recent example of this phenomenon was in early 2020, when, as the world economy was shutting down due to Covid-19, the S&P 500 began a bull run that erased the 34% year-to-date decline and even finished the year positive almost 20%. Markets do funny things.
Below is a chart from J.P. Morgan that I’ve shared before, but it is worth showing again:
Declines in the market are a part of long-term investing and not an indication that markets are broken. The red dots indicate the intra-year percent decline going back to 1980 and the gray bars indicate where the calendar year ended.
Here is another graphic from First Trust that shows the historical length of bull and bear markets:
Going back to 1942, there have been 15 bear markets lasting an average of 11.1 months. We are currently heading into month 9 of the current decline and could be at 11 months by Christmas.
Could it last another 11 months? Sure. Could we have already hit the bottom given the first few positive days of trading in October? Sure.
But here’s the thing about investing for a time horizon longer than 11 months. You don’t need to time these bear markets to be successful at investing for the long term. Bull markets have historically lasted 4 times as long as the typical bear market.
So, if you’re considering selling today and investing in something “safer,” the odds are against you that you will perform better than a diversified portfolio over the intermediate to long term.
And if you say to yourself that I will get back into the market when the economy feels like it’s on better footing, the odds are that the market has already anticipated that well in advance.
In my opinion there is a bright silver lining to all that we’ve been through in the markets in 2022.
First, while bonds have taken it on the chin this year because of higher interest rates, the yields that bonds pay are now higher as a result. The best predictor of future bond returns is the starting yield so our outlook for bond returns hasn’t been this bright in over a decade.
And for stocks, we can’t change what has happened year-to-date but right now is unequivocally a better time to be buying and owning stocks than any other time in 2022. As stock prices go down, future expected returns go up. Are we at the bottom? Maybe so or maybe not. But are the chances good that we will be happy that we were invested in the markets 3, 5, or 10 years down the road? I like those odds.
Looking for more commentary about 2022 markets? Check out these other posts: