NEW YORK, NEW YORK – AUGUST 05: Traders work on the floor of the New York Stock Exchange (NYSE) on … [+]
The S&P 500 gained 24.3% in 2023 and is up another 20.8% through the first three quarters of 2024. Despite the powerful gains we’ve seen in US equities over the last two years — and more broadly, over the last 15 years — there are investors who keep missing out while waiting for some other shoe to fall.
Well, let it fall.
Despite certain calamities — like the Great Recession or the tech bubble of the early 2000s — the S&P 500 has turned into a long-term, compounding machine.
As the index continues to knock out new record highs this year, it serves as a reminder that periods of panic and underperformance proved to be excellent opportunities for long-term investors. Put another way, past declines only built a larger base for the eventual liftoff.
Stock Market Declines Are Scary
When we endure pullbacks, there tends to be a feeling of “this is it! This is the big one!” Maybe that’s because we’re scarred from the brutal bear markets during the first decade of the 2000s, or in more recent years, the volatility and declines associated with Covid and high inflation. Perhaps it’s just human psychology.
Unfortunately, financial decisions often become emotional, and there’s an immense fear of losing our hard-earned money. That’s especially true when we don’t understand why stocks are pulling back and aren’t sure how far they will fall.
The reality is that pullbacks are just part of the journey.
The S&P 500’s annual returns since 1942
Going back to 1974, the S&P 500 averages a pullback of 5% or more about three times a year. In other words, it’s not uncommon to encounter a mild pullback every three to four months. Further, the average intra-year correction from top to bottom is roughly 14%.
Investors’ emotions tend to be at their highest when the market is near a bottom. Unfortunately, we don’t tend to make very good financial decisions when our emotions are being exposed.
That’s why we shift our mindset.
Pullbacks Are a Feature, Not a Bug
Imagine for a moment that you’re a consumer who goes to the grocery store and mostly buys the same items each week. Then one day, the store is running a 5% to 10% discount. The shopper would be ecstatic!
So why don’t we feel that way about stocks, particularly when investors are buying on a monthly or bi-weekly basis while utilizing a timeline that often measures in decades rather than days?
By now, you’re likely connecting the dots that pullbacks equal lower prices, and with stocks at all-time highs, that’s a good opportunity for long-term investors. That is the case — but it’s only anecdotal at this point. Let’s dig into the numbers to prove it.
Looking back over the last 82 years of market performance (because this data set started in 2022 and has since been updated), the S&P 500 sports a remarkable track record. Since 1942, the index has generated a winning percentage of 79% when measured on an annual basis.
The number of up-years vs. down-years since 1942
When looking at the total annual return for the S&P 500 — in other words, including the dividends — the average up-year return weighs in at 19.8% vs. the average down-year decline of just 12.1%.
So not only has the S&P 500 averaged a gain roughly four out of every five years since 1942, but the up-years are typically more powerful than the down-years.
If the above data seems cherry picked, that’s not the case. Similar observations hold up over different time spans as well. Look at the annual win-rate over the following measures:
- Last 20 years: 81%
- Last 30 years: 77%
- Last 40 years: 80.5%
- Last 50 years: 78.4%
The S&P 500 only had one stretch of back-to-back losses (in 1973 and 1974) and one stretch of three straight down years (2000, 2001 and 2002). Conversely, the index had 12 stretches of three or more consecutive annual gains.
In fact, it had one streak of eight straight annual gains and two streaks of nine straight annual gains.
The Bottom Line
Unfortunately, powerful performances don’t necessarily promise the same for the future. But for investors who are in it for the long haul, it has paid to embrace the dips and accumulate through bear markets, while holding out for brighter days ahead.
That’s not a thesis rooted in hope, it’s an argument cemented in data, and that data tells us that the selloffs have proven to be buying opportunities vs. opportunities to panic.
Bull markets tend to run long and hard, while bear markets are usually swift, deep, short-lived — and yes, painful. While pullbacks may catch active investors off-guard, they are a gift for long-term investors who consistently add to their equity positions.
