Then and Now

The 2010s saw one of the best bull markets in modern history. Yet, volatility can never be discounted, as the decade was not without several pullbacks. What was going on then? And what is going on now? The short answer is the fundamentals.

Then—favorable fundamentals

During the 2010s, the Fed kept the fed funds rate at a rock bottom level for much of the decade, as the economic expansion was modest, and inflation was low. Notably, inflation failed to hit 2% for most of the decade based on data from the U.S. BLS and the U.S. BEA.

Moreover, corporate profits rose steadily. In other words, low inflation + low interest rates + corporate profit growth = very fertile ground for equities.

Now—blame it on the Fed & more

Today, the economy is expanding, and corporate profits are rising, according to Refinitiv.

However, a good Q1 profit season, at least for most firms, didn’t prevent a big slide in stocks.

Unlike the 2010s, inflation is rising and the Federal Reserve, which kept a very easy policy in place for far too long, is playing catchup and contributing to investor angst.

Besides the Fed and inflation, investors are worried about the possibility of a recession, geopolitical tremors in Ukraine, and draconian Covid lockdowns in China, which have aggravated supply chain issues.

Many potential outcomes have fueled volatility.

Taking the stairs up and the elevator down

Market weakness can be unnerving. But let’s look at some encouraging long-term data.

The Schwab Center for Financial Research reviewed S&P 500 data going back to 1966. While we know that past performance doesn’t guarantee future results, the Schwab found that the average bear market lasted 446 days (including weekends/holidays), with an average decline of 38.4%. Bull markets, however, averaged 2,069 days and returned an average of 209.2%.

Nonetheless, we have not officially entered a bear market, defined as a 20% peak-to-trough decline in the S&P 500 Index. If we do, its start would date back to January 3.

From its closing peak of 4,796.56 on January 3, the S&P 500’s most recent closing bottom of 3,900.79 on May 19 translates into a peak-to-trough loss of 18.68% (St. Louis Federal Reserve).

Yet, market timing is exceedingly difficult. As one financial journalist once commented, “The market timer’s Hall of Fame is an empty room.”

Put another way, “I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two,” legendary investor Warren Buffett said.

Buffett has an investment plan that he follows. Your investment plan is designed to take unexpected detours into account, but it isn’t set in stone.

As life’s circumstances change, the plan can be revisited. However, as the plan discourages one from taking on too much risk when stocks are soaring, it also discourages one from selling when the waters turn choppy.