Market Fluctuations: Insights for Long-Term and Short-Term Investors

The term “Stock market whiplash” has been prevalent in recent discussions, perfectly describing recent market events. The S&P 500 (SNPINDEX: ^GSPC) saw an increase of over 4% early this year. However, concerns regarding tariffs from the Trump administration led to a significant drop of nearly 19%. Fortunately, the index bounced back when the White House postponed imposing steep tariffs by 90 days.

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Investment Timing for Long-Term Investors

According to Yardeni Research, the S&P 500 has entered a bear market 25 times since 1928, often experiencing correction territory even more frequently. The long-term performance chart, dating back to the S&P 500’s inception in its current form with 500 companies on March 4, 1957, should provide long-term investors with clarity on whether to purchase stocks now.

^SPX data by YCharts

History is consistent: it is generally a good time to invest if you are prepared to hold your investments for a substantial period. Major past market sell-offs, including the burst of the dot-com bubble, the 2008 financial crisis, and the sharp decline at the start of the COVID-19 pandemic, were difficult, but they appear as minor setbacks against the backdrop of S&P 500’s overall performance.

Although buying close to market lows can yield greater returns, market timing is notoriously challenging. Investors who sell stocks to avoid downturns risk missing the eventual upturn. Conversely, attempting to trade during market volatility can lead to further losses compared to simply holding onto stocks.

At present, there is uncertainty regarding whether the S&P 500’s rebound will persist or if it will suffer another decline. However, historical patterns indicate that the Stock market tends to rise over time.

Opportunities for Shorter-Term Investors

Financial advisors typically caution against investing in the Stock market if you expect to need the money within the next five years. Yet, for those with a 10-year investment horizon, history suggests solid chances for profitability in the S&P 500, even for investors not willing to wait several decades for gains.

Looking back to 1926, the annualized rolling return of the S&P 500 (and its predecessors) over ten years has almost always been positive, with many periods showing double-digit returns.

The Historical Advantage

For both long-term and shorter-term investors, historical performance supports a positive outlook. This stems from a phenomenon often termed the stock market’s “autocorrect” feature. For instance, declines linked to economic downturns are typically followed by Federal Reserve interest rate cuts, which facilitate business expansion and recovery.

Currently, the S&P 500 has been affected by tariff concerns. However, prolonged market downturns tend to generate political pressure for changes in policy, with elections offering a scheduled correction mechanism. In the U.S., a new Congress is elected every two years, and a president every four years.

Moreover, the S&P 500’s structure itself acts like an autocorrect system. Stocks that demonstrate success gain a larger index weighting, while underperforming stocks lose their standings and can be replaced if their market capitalizations fall significantly.

Though some may prefer to wait for market clarity before acting, historical trends suggest that buying and holding is typically the best strategy for investors with a long enough timeline.

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Keith Speights holds no positions in any of the stocks mentioned. The Motley Fool also holds no positions in these stocks. The Motley Fool adheres to a strict disclosure policy.

The views expressed are those of the author and do not necessarily reflect the opinions of Nasdaq, Inc.