Written by Guest Contributor: Paul A. Werlin, President, Human Capital Resources, Inc.
The stock market is a mess! Up a 1,000 points one day, down a 1,000 the next. If you’ve looked at your brokerage account statement lately, most likely you’ve seen the value of your account drop. And drop some more. In fact, all the major indices are down. As of 5/9/2022, the Dow Jones Industrials, -8.11% 3 months, -11.26% YTD; S&P -10.99% 3 mo., 16.26% YTD; and the tech heavy NASDQ, -17.07% 3 mo., -25.71% YTD. There’s agreement among most professionals that this drop has been caused by a number of factors- soaring inflation, the high cost of oil and the war in Ukraine are all factors. Now add the Federal Reserve raising interest rates (to curb inflation)—all combining to increasing fears of a serious recession in the US and around the world. In fact, as I write this, today the DJIA has fallen more than 1,000 points, it’s worst day of the year.
Most believe this latest drop is a direct reaction the Fed raising interest rates ½% point. This, in turn, spooking investors into dumping stocks with inflation, corporate earnings and higher mortgage rates making recession more likely. But do rising interest rates really mean lower stock prices? Back in 2000, the last time the Fed raised rates 50 basis points, the S&P 500 went on to rally 7.3% on average in the twelve-months following 50 basis point rate hikes from the Federal Reserve between 1978 and 2000. The largest gain over twelve months was after the Fed lifted rates by 50 basis points on February 1, 1995. But, then again, the S&P 500 did lose 12.3% twelve months following a 50-basis point rate hike on May 16, 2000.
Historically, the benchmark S&P index gained an average 3.7% in the six months after a 50 a basis point rate increase. And all this volatility! Is this stock market really gyrating more than markets in the past? Actually, no. After setting a record closing high of 4,796 on January 3, the S&P 500 then dropped 13% to 4,170 on March 8. It then rallied to 4,631 on March 29, but then fell again hitting a closing low of 3991 on May 9th which is a drop of about 17%. However, this year’s moves are really not that out of the ordinary. Since 1950, the S&P has seen an average annual max fall of 14%, but despite these drops, the S&P still managed to generate positive returns in 32 of 42 years that saw intra-year drops of 14%.
While an oncoming recession has historically been pretty bad for stocks, most economists seem to agree that the economic data points to continued economic growth. If the economy does avoid going into recession, the current selling may be reflecting a growth scare. RBC Capital Markets reviewed how the S&P 500 performed around four recent growth scares — which came with market drops of between 14.2% and 19.8%. If a median growth scare drops the market 17.7%, the S&P 500 would fall to ~3,950 this time around, while a late 2018-type drop of -19.8% would take the S&P 500 to ~3,850. But more importantly, following the market troughs, the six-month returns ranged from up 18.2% and 28.6%.
The 12-month returns ranged from 26.6% to 32.0%. Just remember that some of the strongest rallies in the market occur during the biggest selloffs.
Now there are many factors that make current market conditions unique, and no one can predict the future, but so far, the market’s moves have not been significantly off historical averages.
Bottom line: Yes, there is volatility. Yes, it is unsettling to everyone. But all the evidence indicates it’s not a time to panic, and dumping stocks is not the answer. It’s virtually impossible to time the market, and the best strategy is to hold quality investments for the long term.
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