The average one year S&P500 index return when it was 25% below a 52wk high was +23.9%, the average 3 year return was +40.3%, and the lowest 3 year return was -3.9%. Many analysts warn of risks in the current market, but the greatest danger has already passed.
Declines of 25% have only happened during global crises. Wars, inflation, and political turmoil made these appear to be very risky times to invest, however lower stock valuations actually resulted in below average risk. Governments, businesses, consumers, and investors respond dynamically to challenges. Resources are reallocated. Problems may not be completely solved, but worst case outcomes are avoided.
On 9/30/22 the S&P500 closed 25.3% below its peak reached on 1/3/22. Inflation and interest rates have risen sharply. Russia launched a highly disruptive and unwinnable war against Ukraine. China is fighting an unwinnable war on COVID. Nobody knows how much damage will result from these challenges and nobody knows when they will end. But one way or another they are likely to be resolved:
- Inflation could move down the Fed’s target of approximately 2%.
- Interest rates could fall to a modest premium over the Fed’s inflation target of 2%. The US 10-year bond yield could drop to 3%.
- China’s COVID suppression is incompatible with Xi Jinping’s bold vision for China’s role in global affairs. The people have been isolated and the economy has been hobbled. Policy must evolve.
- Russia’s war has failed, but fighting continues because it would be embarrassing for Putin to admit defeat. He was overconfident and never mobilized resources and popular support for a long costly war so the domestic political risk of continued hostilities is rising. Putin depends on support from Xi Jinping and values contacts with world leaders such as Erdogan and Modi. One of them might be able to find a formula for cessation of hostilities.
The recent bear market has only seen 4 days with a close 25% below the 52 week high. Some prior bear markets continued for many months. Indices usually traded lower at some point after a 25% decline, however a multi-year buy-and hold strategy always recovered from the drawdown and usually earned an exceptional return.
DISCLOSURES & NOTES
At the time of publication the author held no position in the S&P500 Index. The author does not make any recommendation regarding any investment in the S&P500 Index. Investors are encouraged to check all of the key facts cited here from SEC filings and other sources prior to making any investment decisions
Koneko Research 