Anthony Saglimbene, Chief Market Strategist - Ameriprise Financial
As of Feb. 20, 2023
2023 is off to a strong start, and stock prices have rallied on the hope inflation will continue to moderate lower, the Federal Reserve can soon pause its tightening cycle, and the U.S. economy can avoid a deeper slowdown. But conditions remain highly uncertain, and investors stung by last year's declines across stocks and bonds are rightfully nervous about staying invested in such an uncertain environment.
Below are six historical points of context that suggest investors should remain invested and unshaken by the challenges of the day:
1. Back-to-back years of stock declines are rare
After last year's roughly 18% decline in the S&P 500 Index, investors may ask if 2023 will hold more of the same. And is the early move higher in stock prices this year just another bear market bounce? While we can't definitively answer those questions, the S&P 500 has experienced calendar-year losses between 10% and 20% in the past — eight to be exact going back to 1929. However, that is a relatively small number of years compared to the sixty-nine calendar years where the Index posted a positive calendar year return. It's also rare that the S&P 500 posts consecutive negative calendar year returns (i.e., 2000 – 2002, 1939 – 1941, and 1929 - 1932). The bursting of the tech bubble, the Great Depression, and World War II were historically significant macroeconomic events that weighed on market sentiment during these periods and hence contributed to the S&P 500 posting a string of poor performance over multiple years. While the Federal Reserve is unlikely to help stock prices with lower interest rates any time soon, we believe today's elevated inflation pressures or even a shallow U.S. recession are unlikely to trigger years of consecutive negative stock returns like the eras described above.
Source: Bloomberg, S&P Dow Jones Indices, American Enterprise Investment Services, Inc. Data as of 1/31/2023.
Past performance is not a guarantee of future results.
2. Declines across stocks and bonds in the same calendar year are very infrequent
With interest rates increasing aggressively in 2022, bond prices posted their worst year in decades. At the same time, slowing growth trends, higher interest rates, and growing recession fears sent stock prices lower as well. However, stocks and bonds historically share a less correlated relationship, with one asset usually helping to offset declines in the other. As the chart below shows, stocks and bonds are more often higher in the same calendar year than down. In our view, the sharp increase in interest rates is in the rearview mirror. As a result, bonds offer an attractive yield today, and we expect stocks and bonds to again offer investors valuable diversifying properties that were not present last year.
Source: S&P Dow Jones Indices, Bloomberg, American Enterprise Investment Services, Inc. Data: Stocks are represented by the S&P 500 Price Index. Bonds are represented by the Bloomberg U.S. Aggregate Total Return Bond Index. Data as of 01/31/2023. Past performance is not a guarantee of future results.
3. Stocks tend to return to form when the Federal Reserve stops raising interest rates
The Ameriprise table below shows the last several Fed rate hiking regimes and the subsequent performance of the S&P 500 Index over a few trailing periods following the first rate hike. History shows stocks tend to decline over the first several months of a rate hiking cycle and then rise in out periods once the Fed has stopped raising interest rates. However, the Fed has raised interest rates more aggressively than history in the current tightening cycle. As a result, the S&P 500 moved lower at a rapid pace last year compared to recent periods of Fed tightening, where rate hikes were more modest. But as the Fed moves closer to pausing rate hikes, we suspect such a development could coincide with inflation pressures moderating in the economy. As such, we believe the longer-term setup for stock returns could improve.
Source: Federal Reserve Board, FactSet, American Enterprise Investment Services, Inc. A Fed tightening cycle starts from the first rate hike and ends with the last rate hike. Rates are based on Target Fed Fund Rate Upper Limit. *Represents the current cycles as of 02/08/2023. Past performance is not a guarantee of future results.
4. Over longer periods, stocks, bonds, and gold outperform inflation
Higher inflation levels can disrupt asset prices, particularly when they rise unexpectedly or swiftly. The Ameriprise chart below shows that stocks, bonds, and gold can underperform inflation over shorter periods. However, over the longer term, stocks tend to outperform inflation, helping investors build wealth and protect purchasing power.
Stock performance is based on the following: 1871 - 1917, Cowles Commission Index as converted by the Standard & Poor’s Corporation and available through the National Bureau of Economic Research (NBER).1 *Gold prices were largely fixed prior to 1971. Data represents 1971 onward.
5. Time in the market beats market timing
Remaining invested through the highs and lows in the market is generally one of the best ways to build wealth over the long term. Missing out on the market's best days by reactively selling can erode an investor's long-term return potential and reduce the probability of investment success. Often, the stock market's biggest down days occur near the market's largest up days.
Source: Bloomberg, Standard and Poor’s, American Enterprise Investment Services, Inc. Returns assume investor was fully and continually invested in the S&P 500 Total Return Index except for the days specified. Calculations assume no fees or transaction costs. Past performance is not a guarantee of future results.
6. All bear markets have one thing in common – they eventually end
As this chart of the S&P 500® Index illustrates. history suggests that stocks tend to perform well on average once the stock market troughs and starts to anticipate a more prolonged period of recovery. We believe investors should remain invested and take a multi-year view of the investment landscape in periods of elevated uncertainty.
Source: Bloomberg, S&P Dow Jones Indices, American Enterprise Investment Services, Inc. Bear markets defined by a drop of 20% or more from market peak to market trough based on S&P 500 Total Return Index. Index must have recovered completely (closed above previous peak) before a new bear market can begin. Past performance is not a guarantee of future results.
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