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A turbulent week for the US stock market
The US stock market just experienced a very volatile week: two days its price fell by about 4% and two other days it rose by 1.5% or more. If anything, these amounts don’t do justice to the amount of within-day turbulence exhibited. For example, on February 5, share prices fell by about 1% during one minute, then rose at a similar pace about five minutes later. On February 9, prices rose 1% as the market opened, declined steadily to -1.5% by mid-day, and then rose up close to 1.5%—two swings of 2.5% or more during the day!
Stay focused on the long-term
Such wild gyrations render it all too easy to focus on the price movement and forget about the long-term benefits of equity investing, namely the ownership of shares of profit-generating companies. Share prices reflect sentiment during each trade and can therefore change very quickly if sentiment changes quickly. The underlying companies’ operations also change over time, slowing during recessions and accelerating during economic recoveries, but do so at a vastly gentler pace than that sometimes displayed in the market for their shares.
These ups and downs are common
The current price decline may seem particularly pronounced, but a quick look at history shows it to be nothing out of the ordinary. For the S&P 500 index of the 500 largest US stocks, the chart below shows over the last 90 years each year’s largest within-year price decline, along with the total return for the entire year (including dividends).
S&P 500: Annual Returns and Intra - Yea price declines
Several things are readily apparent. First, the average within-year (“intra-year”) price decline was quite large, roughly -16% across the nine decades. Even excluding the 1920’s and the 1930’s, which were heavily affected by the Great Depression, the average intra-year decline was –14%.
Secondly, an intra-year decline occurred in each of the 90 years. Sizeable intra-year declines are clearly the rule, not the exception.
Finally, the average annual return across all years was nearly 12%, much higher than the average intra-year decline of -14%.
Moving forward with your investment goals
We often repeat the mantra that short-term price volatility is the cost investors must bear in order to reap the long-term benefit of stock returns that exceed those available from safer investments, such as bonds and GICs. In times such as last week, investors can be challenged to stick to their long-term strategies. However, as history amply illustrates, the negative sentiment that causes stock price declines eventually subsides, the ongoing growth of company earnings eventually comes to the fore, and stock investors have been and will continue to be handsomely rewarded for their patience.
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