May 3, 2022

LOOK BEYOND THE PEAK
TO THE VALLEY

by Adam J. Morgan, CFA, CMT

Well, it’s official…  The stock market, as measured by the S&P 500 index, is off to its worst start to any calendar year since 1939.  For context, in January of 1939 a smaller version of the market index traded at a whopping $13.08 and closed the year at $12.49.  My, what I would give for a time machine!

The S&P 500 hit its all-time high on the very first trading day of 2022 at a price of $4,793 and as of the writing of this note, the index has fallen to $4,170, down roughly 12.5% on the year.  While the result is real and the headlines can be daunting, I believe longer-term investors have reason to be optimistic. 

First, the bad news: we don’t have a time machine.  But we do have the benefit of history.  Let’s look at the market to see if history can provide any indication as to what we can expect. 

In April, the S&P 500 dropped below its 200-day simple moving average, as illustrated below, and stayed there for the majority of the month.  Why is this significant?  According to CNBC contributor Josh Brown, 47 of the 50 BEST and WORST days in stock market history occurred while the S&P 500 was trading below its 200-day simple moving average.

So the stock market is already down 12.5% on the year and likely to continue to be volatile for some period of time but, if history is any indication, there will be both big down days and big up days. 

Let’s pause for a moment to remember a very important point.  This is why we construct diversified investment portfolios.  After all, the stock market is only behaving as it always does.  Stocks are risk-bearing assets.  The returns are not free.  You earn your return by bearing some degree of risk, which is occasionally realized.  And long-term investors who invest in accordance with their financial plan know that the market has never failed to again someday, achieve new highs.

Now, let’s continue to look at some historical data to see why it might be worth hanging on.  The table below shows the low of the stock market during every single Midterm Election year dating back to 1914 and the subsequent high of the stock market the following year.

Again, if history is any indication of how things will go over the next 18 months or so, investors who get nervous and sell into the volatility of 2022 may just miss out on the gains that potentially lie ahead in 2023.  One thing to notice as you look over this table, every single result is positive, meaning that the low of the Midterm Election year was never the low point for long.  The other thing to notice is that the average upside is quite large as a 46.8% average return far exceeds the average annual return on the S&P 500.  Obviously, there is no guarantee that this pattern will hold over the next year, but I’d hate to be wishing that I had a time machine in 18 months only to use it to get back to today.

- Adam Morgan

Nothing contained in this post is intended to constitute legal, tax, securities or investment advice, nor an opinion concerning the appropriateness of any investment, nor a solicitation of any type and does not guarantee future results. The information contained in this post should not be acted upon without specific legal, tax and investment advice from a licensed professional. Past results are not indicative of future performance.