Intra-year Market Drops
And how's that for a start to the year. If you are waiting for markets to settle down, you'll be waiting a while I'd say. Markets don't settle down, it's the nature of the beast. These are the rules of the game. It's no different to having children, they throw tantrums, scream, yell, and don't do what we want them to do. Yet over the long run, I believe, the pros associated with having children far outweigh the hiccups along the way. This is super important to understand when investing in the stock market. Just like my kids don't give a sh*t about what I think, the stock market doesn't give a sh*t about what you think - it'll do what it does.
There are however, instances when the consequences of such movements by the market are clear. Buy in times of crisis and fortunes are yours, buy in times of euphoria and fortunes will be for others. Unfortunately for most investors however, these are the most volatile of times. Investors' fear is at it's peak during it's most turbulent times, and greed is at it's peak during the most euphoric. Twelve months ago we witnessed the sharpest decline in equity markets. Today, we are witnessing stratospheric returns in a handful of stocks. Prices oscillate between the two extremes. Burton Malkiel put it perfectly:
In fact, prices are always wrong. What’s right is that nobody knows for sure whether they’re too high or too low. It’s not that the prices are always right, it’s that it’s never clear that they are wrong. The market is very, very difficult to beat.
The market constantly provides opportunity for investors. The issue for investors is that most don't have a game plan. So when the opportunity arises, they're either unprepared and don't know what to do, they make the wrong move, or they're simply to slow to act and the opportunity is gone.
The chart below plots the S&P 500 calendar year return represented by the red bar, and the maximum intra-year decline represented by the blue dot, going back to 1980 (2021 is YTD). We have witnessed intra-year declines as low as 3% during 2017, and up to declines of 49% during the GFC. In fact, the average intra-year decline is around 14.3%. And despite this average annual drop, the stock market has returned positive returns for the year end 31 out of 41 years - a 75% chance of a positive return. Now imagine for one moment, the roulette table at Crown Casino was offering those odd, I have no doubt in my mind you would be at the table with a glass of whiskey in no time, playing and playing and playing, because the odds of winning are so high. Yet investors constantly focus on the 1 in 4 year event - the 25% chance of loss.
What is clear is that intra year declines are normal. And the market is capable of recovering from them, and in fact finishing the year in positive territory. This should encourage investors to invest during times of crisis, and to stay the course when markets get choppy.