If there is anything to hang your hat on during the current bear market in stocks, it’s that longer term markets tend to rebound very nicely.
The S&P 500 has been higher three years later in eight out of nine cases in which the index has fallen 20% or more from an all-time high going back to 1957, according to research from Truist co-chief investment officer Keith Lerner. Stocks have returned on average 29% during those eight cases.
Interestingly, stocks have also sharply regained ground a year after falling 20% or more from a high. Lerner’s data shows the S&P 500 has increased 15% on average in the seven times stocks have tanked 20% or more from a high dating back to 1957.
“Given the wide range of outcomes,” Lerner wrote in the note to clients, “our view is that this is not the time to be aggressive, but we are also not advocating reducing equities for investors who are aligned with their longer-term equity allocations. At this point, a lot of the excesses have been wrung out.”
To Lerner’s point, investors have moved quickly this year to re-price stocks amid sky-high inflation and a Federal Reserve locked and loaded on interest rate hikes.
The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average are all having their worst starts to a year in several decades. Lerner points out more precisely that this is the third worst return at the halfway point for markets since 1950 and the weakest since 1970.
Virtually no areas of the market have been spared from the bears’ teeth.
Growth stocks such as Amazon, Tesla, and Netflix are all down more than 30% so far in 2022. A relative safe-haven such as Apple is off by 18% on the year.
Overall, markets continue to be on recession watch for the U.S., the world’s largest economy.
The Atlanta Fed GDPNow model is now predicting a 2.1% decline in Q2 U.S. economic output, which would meet the unofficial threshold for a recession when matched with the 1.6% decline in Q1.
“This is actually a really difficult time to be thinking very long-term,” BlackRock global allocation head of thematic strategy Kate Moore said on Yahoo Finance Live (video above). “We know that there are a tremendous number of crosscurrents right now in the market. It is not just monetary policy and the durability of inflation, but also kind of what is going on geopolitically.”
Three years from today couldn’t get here quick enough for investors.
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