Currently, the world and the stock market are in one of the most precarious places in recent memory. The ongoing war between Russia and Ukraine continues with no end in sight. Meanwhile, war is breaking out in the Middle East as Israel and Hamas fight in the Gaza Strip. Beyond the genuine geopolitical concerns, economic and Wall Street concerns are reaching a fever pitch. Stubborn inflation is causing the Federal Reserve to keep interest rates higher for longer. Though GDP growth is healthy, the number is clouded by a significant increase in government spending. From the outside, it looks like a return to the “Stagflation” days of the 1970s, where inflation rose, growth slowed, and gas lines became commonplace. To add to the pain, the S&P 500 Index ETF (SPY) and the Nasdaq 100 ETF (QQQ) reached correction territory this week (10% off highs). Simultaneously, the weakest index, the Russell 2000 Small Cap ETF (IWM), reached its lowest levels since 2020.
5 Reasons It’s Important for Investors to Keep a Long-term Perspective
1. US Equities Rise Over Time
The average annualized return since the S&P 500 Index’s inception in 1950 is ~10%. In other words, corrections are a part of normal cycles, and the bulls may lose some battles, but in the end, bulls win the war.
Image Source: Zacks Investment Research
2. Corrections are Normal
Since 1980, the average intra-year correction in the S&P 500 Index is ~14%. Though stocks move higher over the long term, it’s never in a straight line, and they stair-step higher along the way.
3. The Crowd is Rarely Correct
Legendary value investor Warren Buffet famously said, “I will tell you how to become rich. Close the doors. Be Fearful when others are greedy. Be greedy when others are fearful.” Though the current correction is normal in terms of depth, investors are abnormally fearful. The CNN Fear & Greed Index is at Extreme Levels. The American Association of Individual Investors, another sentiment survey, reached its highest “bearish” reading in nearly six months.
Image Source: American Association of Individual Investors
4. October is the Bear Market Killer
Seasonality trends have played out nearly perfectly in 2023. Today, October 27th, happens to be the average day the S&P 500 Index bottoms (using data going back to 1950). Though history doesn’t repeat itself, it tends to rhyme.
Image Source: Ryan Detrick, Carson Research
5. Small Caps are at “Rock Bottom”
Even after the recent correction, the Nasdaq is up around 30% year-to-date. However, small caps have weighed down the broader market for much of the year. The Russell 2000 Index has not made a 52-week high for almost 500 days, which means it’s closing in on its worst drought in history. Can things get worse? Absolutely, but the data tells us we should be nearing a bottom soon.
Image Source: Jason Goepfert/Russell Investments
History tells us that market pullbacks are an inescapable part of investing. In the short term, the market is volatile and difficult to trade. However, markets can change on a dime when the crowd least expects it, so investors should keep a long-term perspective.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.