In the aftermath of the near 175% rally in the S&P 500 Index since the March 2009 trough, many investors are fearful that equity markets, having moved too far too fast, may be due for a correction. The reality is that corrections happen fairly often, even in the good years, including fairly significant intra-year declines in recent strong-return years like 2010 and 2012. In fact, a look back at the calendar years over the period from 1980 to 2013 reveals that the S&P 500 Index has experienced at least a 5% intra-year price decline in every year but one. Still, equities posted positive returns in 26 of those last 34 years, with average annualized total returns (that include dividends reinvested) over that period approaching 12%.
Trying to time the market has often proved to be a fool’s errand. Individual investors have infamously failed to outperform not only the broad equity market, but also the rate of inflation.1 Investors have often been left waiting for market corrections that never materialize (remember when the Fiscal Cliff, sequestration and the government shutdown were going to be the catalysts?) or fail to jump in once the corrections occur. Fund flows suggest that few investors viewed the 2010 or 2012 pullbacks as buying opportunities even as they lamented that the market rally hadn’t paused long enough to provide attractive entry points.
Already this year the S&P 500 Index has experienced a peak to trough decline of nearly 6% only for markets to now be re-testing nominal highs. Could another correction be in the offing? If history is any guide then my answer is perhaps.
But history would also suggest that for true long-term investors, it should be of little consequence. Even those long-term investors that got in at the most inopportune times (1987, 2000 and 2008 for example) but stayed invested, were ultimately made whole and then some.2 Regardless of what the near-term brings, we maintain the case for equities remains strong. Equity valuations appear reasonable, stocks trade cheap to bonds, and the historically favorable-to-equities macroeconomic environment of modest inflation, modest growth and still-accommodative monetary policy is likely to persist.
- Source: Ibbotson, 12/31/13.
- Source: Bloomberg, 12/31/13.
The S&P 500 Index is a broad based measure of U.S. equity performance. The index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.
There is no guarantee that the issuers of stocks held by mutual funds will declare dividends in the future, or that dividends will remain at their current levels or increase over time.