Investing in Times of Volatility

May 17, 2022 By Glenn Guard, CFA
Roller Coaster with people in the cars. West Financial Services.

Well… the stock market finally pulled back. After three years of fantastic performance, the market is down so far this year.

S&P 500 Total Return 

04-30-22   -12.9%
12-31-21    28.7%
12-31-20    18.4%
12-31-19    31.5%

Source: Standard & Poor’s

In times of uncertainty and market volatility, some may be inclined to react and need guidance or reassurance based on their situation, history, and current economic data. When we are constantly bombarded with the negative news of the horrors in Ukraine, China, COVID, staffing shortages, etc., and we see and experience the outcomes all around us, it is challenging at times to not harness what we are biologically programmed to do: react to the situation!

The stock market does not go up in a straight line forever. What we are experiencing is a natural cycle in response to current events.

That said, let’s take a look at some positive data:

  • From 2012 through 2021, the S&P 500 enjoyed an average annual return of 14.8%.
  • From 1926 through 2021, the U.S. stock market has posted an average annual return of 10.5%.

Source: Standard & Poor’s

You can achieve respectable returns during periods where crises seemed to abound: The Great Depression, World War II, the Korean War, the Cuban Missile Crisis, Vietnam, the civil unrest of the 1960s, the Cold War, the OPEC Oil Embargo, the Financial Crisis in ‘09, COVID. Were there highs and lows in the market? Of course! And yet, our country and our economy remained resilient. And though not a betting man, I would bet we continue our ability to ride out the turbulence, gracefully. Alright, maybe the ride isn’t so graceful every time, but it comes to an end and we firmly plant our feet on the ground and move forward, often better off for the experience.

Stock Market Since 1900

Chart: Largest economies by GDP in 2021. US dollar on left axis ranging from $0 trillion to $24 trillion, countries on horizontal axis. US economy is $22.94 Tn. China economy is $16.86 Tn. Japan economy is $5.10 Tn. Germany economy is $4.23 Tn. UK economy is $3.11 Tn. India economy is $2.95 Tn. France economy is $2.94 Tn. Italy economy is $2.12 Tn. Canada economy is $2.02 Tn. Korea economy is $1.82 Tn. Source: International Monetary Fund

Source: FactSet, NBER, Robert Shiller, J.P. Morgan Asset Management

The United States remains the strongest country in the world, both economically and militarily, by a long shot. It will remain that way for the foreseeable future. No other country comes close — China included.1

Largest Economies by GDP in 2021

Chart: Stock market since 1900. Price of the S&P 500 Composite Index on left axis in log scale to best illustrate long-term index patterns, ranging from 1 to 1,000. Periods of conflict on the horizontal axis for calendar years ranging from 1900 to 2019. S&P price ranges referenced include the intra-year low and high during the time period referenced. Great Depression (1929-1939) S&P price ranged from 4.40 to 31.86. New Deal (1933-1940) S&P price ranged from 5.53 to 18.68. World War II (1939-1945) S&P price ranged from 7.47 to 17.68. Korean War (1950-1953) S&P price ranged from 16.65 to 26.66. Vietnam War (1969-1972) S&P price ranged from 69.29 to 119.12. Stagflation (1973-1975) S&P price ranged from 62.28 to 120.24. Oil Shocks (1973-1979) S&P price ranged from 62.28 to 120.24. Reagan era (1981-1989) S&P price ranged from 102.42 to 359.80. Black Monday (1987) S&P price ranged from 223.92 to 336.77. End of Cold War (1991) S&P price ranged from 311.49 to 417.09. Tech boom (1997-2000) S&P price ranged from 737.01 to 1,527.46. Global financial crisis (2008) S&P price ranged from 752.44 to 1,447.16. COVID-19 (2020) S&P price ranged from 2,237.40 to 3,756.07. Past performance is not indicative of future returns. Source: FactSet, NBER, Robert Shiller, J.P. Morgan Asset Management.

Source: International Monetary Fund

Legendary investor Warren Buffett has a famous saying: “I try to be fearful when others are greedy and greedy when others are fearful.”2 On the surface, it suggests that investors avoid herd mentality. The deeper meaning is that, when it comes to investing, it is always best to evaluate both the negative and positive influencing factors and focus on the facts. In other words, focus on your individual goals, timeline, and needs against this backdrop. And if you have questions about your investments, rely on us for prudent guidance and please give us a call.

Meet Glenn Guard, CFA »

Read the Financial Planning Focus May 2022:

Sources: 

1World Bank: Global Economic Prospects; January 2022.
2Warren Buffett: Letters to Shareholders; 1977-2022.
 

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