Rocky Balboa said, “You, me, or nobody is gonna hit as hard
as life. But it ain’t about how hard ya hit. It’s about how hard you can get
hit and keep moving forward. How much you can take and keep moving forward. That’s
how winning is done.”
Investors are getting hit hard. The broad US equity market,
as represented by the S&P 500 Index, experienced a 30% bear market decline
in the course of 23 trading days.1 That’s roughly 130 days faster
than the typical bear market, dating back to 1900.2 The massive
gains of 2019 disappeared between Valentine’s Day and St. Patrick’s Day.3
The instinct is to sell. Sit the rest of this out. Yet, we can’t stop thinking
about all we have learned of the follies of trying to time the market. We
summon up the famous DALBAR study, and the analysis showing what happens if we
miss the best days in the market (half of those days happen during a bear market4)
and the research demonstrating that stocks, since 1945, have posted positive
returns over 99% of the time over any 15-year period.5 We use a long-term
historical perspective to adhere to the principles of sound investing, such as
consistency and courage, to prevent us from making emotional decisions at
potentially inopportune times.
But let’s not make this another commentary about not selling
in extreme market environments. I owe a response to my friends, family,
colleagues, and clients asking if it is time to buy. The history of the broad
US market teaches us that there has never been a “bad” time to buy the broad
market (the line for the broad market has gone up over time), although there
have certainly been “better” times to buy. First, let’s acknowledge that none
of us can predict when the market will bottom. The number of new COVID-19 cases
will likely need to peak before we get there. That’s a question for the
epidemiologists to answer and a challenge for Americans and global citizens to
take social distancing and/or isolation seriously. When that occurs, I think
investors likely will awake to an environment in which equities are cheap relative
to their own history and to bonds and there may be massive stimulus globally. We
all may want to take advantage of that, but what if we’re too early? What if we
are only halfway through this? Let’s look to history as a potential guide:
- We analyzed the peak to trough periods for six prominent
bear markets (the Great Depression in 1929, the 1987 crash, the 1991 Gulf War,
the 2001 Technology crash, and the 2008 global financial crisis), and made a
hypothetical $100,000 investment into the broad market, represented by the
S&P 500, at the exact mid-point of each of the drawdowns.
- For example, during the global financial crisis,
the market peaked on July 19, 2007, and bottomed 413 trading days later, on
March 9, 2009. Our hypothetical investment was made on day 207 in May 2008,
prior to many of the worst days in the market experienced in Q4 2008 and Q1
2009. Our initial hypothetical $100,000 investment had fallen to $55,450 by the
time the market bottomed in Q1 2009. Ouch! Ten years later it was worth $205,000.
That’s a 7% per year return, notwithstanding the initial loss.6
- In fact, over the six major bear markets we
observed, investors would have lost, on average, 38% between the midpoint and
the bottom. 10-years later, an investor would have returned, on average 110%
cumulatively from the midpoint of the drawdown.7 Who among us
wouldn’t sign up, right now, for a potential doubling of our money in 10 years?
The adage says that time heals all wounds. History suggests
that time in markets not only heals wounds but keeps us “moving forward”—even
if we’re early.
1. Source: Bloomberg, as of 3/18/20
2. Source: FactSet Research Systems, Inc., as of 12/3/19, as represented by the S&P 500 Index.
3. Source: Bloomberg, as of 3/18/20, as represented by the S&P 500 Index.
4. Source: Bloomberg, as of 12/31/19. Research based on the daily returns of the S&P 500 Index. The oft-cited analysis by DALBAR, Inc., examined the average returns realized by investors. The analysis used the net of aggregate mutual fund sales, redemptions, and exchanges each month as a measure of investor behavior, and found that by frequently moving in and out of markets, in an attempt to time their investments, investors often realized long-term returns that were below the returns of the asset classes in which they were invested.
5. Source: Bloomberg, as of 12/31/19. Results based on the rolling monthly 15-year returns of the S&P 500 Index from 1945 to 2019.
6. Source: Bloomberg, as of 12/31/19, as represented by the S&P 500 Index.
7. Source: Bloomberg, as of 12/31/19, as represented by the S&P 500 Index.
500 is a stock
market index that measures the stock performance of 500 large companies listed
on stock exchanges in the United States. It is not possible to invest
directly in an index. Past performance is no guarantee of future results. All
investing involves risk, including the risk of loss.
The opinions referenced above are
those of the authors as of March 20, 2020. These comments should
not be construed as recommendations, but as an illustration of broader themes.
Forward-looking statements are not guarantees of future results. They involve
risks, uncertainties and assumptions; there can be no assurance that actual
results will not differ materially from expectations.
This does not constitute a recommendation of any investment
strategy or product for a particular investor. Investors should consult a
financial advisor/financial consultant before making any investment decisions.
Invesco does not provide tax advice. The tax information contained herein is
general and is not exhaustive by nature. Federal and state tax laws are complex
and constantly changing. Investors should always consult their own legal or tax
professional for information concerning their individual situation. The
opinions expressed are those of the authors, are based on current market
conditions and are subject to change without notice. These opinions may differ
from those of other Invesco investment professionals.