The U.S. stock market did not have a happy holiday. The Standard & Poor’s 500 was down approximately 12 percent for the fourth quarter of 2018, and the large market drop the day before Christmas, ordinarily a quiet trading session, was record-breaking.
Yet the news during this period was mixed. On the negative side, there was the ongoing trade war with China, another Federal Reserve interest rate increase, the government shutdown and executive branch instability, and greater uncertainty around the UK exit from the European Union. On the positive side, corporate profits remained strong (bolstered by the largest corporate tax cut in history), the Conference Board’s leading economic indicators pointed to further growth and consumer spending during the holidays set another record.
After weighing all of this information, investors chose to become bearish.
As I have written many times before, it’s impossible for us to know when investor sentiment will turn around again and the markets will re-experience consistent growth. But you might be surprised at how well the S&P 500 has bounced back after poor quarters in previous years.
Since 1920, there have been 114 quarters (out of 392) in which the S&P 500 has declined – which means 70 percent of the time quarterly stock market performance has been positive. And of the quarters with losses, most were small, with more than 25 percent involving a decline of less than 2 percent.
What happened afterward?
80 percent of the time the subsequent one-year return was positive, and more than half the time the subsequent annual gain was greater than (and totally made up for) the earlier quarterly loss. If we ignore 1929 and 1931 on the assumption that we are unlikely to experience another Great Depression, the losses were completely erased the following year with only two exceptions.
We cannot know what will happen in 2019. But if history is any guide, the longer we remain invested, the greater the likelihood of positive savings growth. And there is one thing we can be sure of: Stocks are considerably cheaper today than they were last quarter. At some point, the bargain buying will commence!