S&P 500
If you were eager to buy stocks earlier this year when the S&P 500 SPX rose 20% to -0.38%, why aren’t you even more eager now?
To help you address your contrarian beliefs, I’ve analyzed how you would have behaved if you bought stocks on the day the S&P 500 closed below 20% in every bear market since World War II. Sometimes the day is nearing the end of a bear market, sometimes the market continues to fall and eventually bounces back. But on average, you’ll do just fine.
And you don’t have to wait that long. In the 12 months after your purchase, your average total return is 22.7%. As you can see from this chart, this is more than double the stock market’s long-term average.
It’s important to admit that this 22.7% is an average and doesn’t perform that well in every case. In two of the 12 major declines since World War II, the S&P 500 has lost more than 20%, and when you buy the index on a day that exceeds the 20% decline threshold, you will be in the red for 12 months. But even in both cases, you eventually prevailed — it only took over a year.
Anyway, keep in mind that this means you have won 10 out of 12 times in a year since WWII. These are not dire possibilities.
You might object to “this time is different,” arguing that the stock market is entering a longer and more severe bear market than it has been since World War II. I’ve gotten a lot of emails from some of you over the past few days with exactly this kind of argument, but contrarians tend to give a positive view of this surge of negativity. I have yet to receive this doomsday email about the market top in January.
But as long as you believe the stock market will eventually bounce back and surpass its January highs, buying now will show greater profits before the market itself.
Doug Kass of Seabreeze Partners is one of the few true lateral thinkers among the consultants I follow regularly. The day after the S&P 500 crossed the 20% drop threshold, he wrote in an email to clients: “The panic of the past few days has resulted in some great long-term returns with rich and cheap upside returns to downside ratios. Opportunity… . While wealth has been lost in 2022, those who buy calmly and selectively today can make a fortune.”
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