Market decline

Proof that this fall in the market does not make sense

The perfectly normal, healthy and expected market pullback is accelerating, causing many investors to worry about a correction or even a new bear market.

The S&P 500 is down 9.4% from its September 2 highs, while the Nasdaq is correcting. Beloved tech names like Apple and Amazon are flirting with bear market territory. There are many competing analysts who will tell you either that this is a classic ‘buy the trough’ moment or the start of the ‘big’, an epic market crash that could reflect the epic market downturn. 50% after the tech bubble burst. For example, supporting the ‘buy the drop’ argument are handpicked facts like

  • from 1997 to 2000, the Nasdaq suffered three corrections of 17% and the tech bubble did not burst
  • Friday, September 18 was the quarterly options expiration day, and the last two bear markets both bottomed the day after the options expired.

On the other hand,

  • JPMorgan Asset Management estimates that if we get a double-dip recession (the economy is showing signs of weakening again) then stocks could fall 22%, or 145 less
  • Ned Davis Research says his baseline scenario is that this is a 15% to 20% correction (so about half as much)
  • Tech bubble 2.0 valuations mean stocks MAY fall into a bearish market right now, rather than relaunching the bubble as happened between 1997 and 2000

Rather than trying to pretend that I know where the market is heading next, let me just point out the strongest evidence that this current market downturn is completely meaningless, and therefore something that cautious investors long for. term must ignore if they really want to accomplish their financial mission. goals.

The ultimate proof that this market downturn is meaningless and does not pose a threat to your retirement portfolio

According to Ben Carlson of Ritholtz Wealth Management, if a company does not make a profit for an entire year, it will reduce its intrinsic value by 10%. It’s based on the most fundamental principle of investing, that intrinsic value is the result of future earnings and discounted cash flows to the present. Why is this important to you during this market downturn / correction?

Because since 1980, the average intra-year decline in the S&P 500 has been 13.8%. This has two important implications that will make all the difference if you hit your financial goals or lose painful amounts of money when the market goes down. First, a market drop of 14% should be something any investor expects in any given year. Second, the fact that the average annual market volatility is also 14-15% over time proves that in the short term the market is not only wrong, but hilariously.

Think of it like this:

  • during pandemic containment, some businesses were shut down completely
  • the S&P 500 is expected to record an 18% drop in EPS this year
  • even if the S&P 500 posted zero earnings this year, the fundamentally justified decline in stocks would be 10% (lower intrinsic value)
  • stocks average 14% each year (representing 1.4 years of zero earnings)
  • individual stocks can drop as much as 20 +% in a single day (representing more than 2 years of zero gains)

The 34% drop we saw in March took the market from around 15% overvalued to 15% undervalued. The ensuing five-month rally took stocks from an undervalued 15% to a historically overvalued 49%.

(Source: Imgflip)

Do you know how much the returns for a given YEAR are related to fundamentals?

8%. Over five years, this rises to 44%. In other words, the “long run” is much longer than most people realize.

Over 10 years, 90 to 91% of returns are a function of fundamentals.

Valuation changes tend to cancel out over time, and initial return + long-term growth ultimately determines virtually all of your returns. This is close to gospel truth as it exists on Wall Street, about as fundamental as the idea that intrinsic value, to which all businesses end up coming back, is a function of future profits, cash flow and dividends.

(Source: Jill Mislinksi)

The market has experienced an average retreat or correction of 5 +% every six months since 2009.

(Source: Guggenheim Partners, Ned Davis Research)

This has also been the case since 1945. The average time to recover to new highs after declines is one month. Correction on average of four months to recover. What if you bought stocks on October 9, 2007, literally just before the Great Recession blew stocks up to 55%?

Investors still managed to double their money even with the worst possible timing and through two bear markets.

What if you had only invested in every peak of the market since 1970? Today, you would still be a millionaire as long as you invested $ 2,000 a year on average, even if you had literally the worst possible timing.

On the other hand, had you perfectly timed the bottom since 1970? You would have gained an additional 22% over a 49 year period, or 0.4% CAGR.

Trusting the construction and risk management of your overall portfolio is the easiest way to ignore market downturns like this. Trying to time the market is the 2nd biggest retirement killer in history, just behind insufficient savings.

  • good long-term investors learn to tolerate and ignore periods of intense short-term volatility
  • great long-term investors learn to accept volatility and exploit it to achieve their goals

Want more great investment ideas?

7 “safe haven” dividend stocks in times of turbulence

When does the next Bull Run start?

Chart of the day – See stocks ready to break


SPY shares were trading at $ 327.65 per share on Wednesday morning, down $ 2.65 (-0.80%). Year-to-date, SPY has gained 3.26%, compared to a% increase in the benchmark S&P 500 over the same period.

About the Author: Adam Galas

Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. Its goal is to help people learn to harness the power of dividend growth investing. Learn more about Adam’s background, as well as links to his most recent articles. Following…

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