There has been a lot of talk in the press about stock market volatility this year. During the last week of January and the first week of February, there was talk of a “correction” (a 10% decline in the stock market). The US stock market (represented by the S&P 500, SPY in the chart below) dropped about 5% between January 22nd and February 3rd. Indices for other stock markets (EFA tracks the MSCI Developed (International) Markets index, EEM tracks the MSCI Emerging Markets index) declined, too. Now, just two weeks later, the US and Developed markets have recovered back to their levels at the beginning of 2014, and Emerging Markets have come close.
For example, an article in the Wall Street Journal in mid February [February 17, 2014] (“Stocks Near Records as Caution Recedes”) says both that the market is poised to rise and that ‘many analysts still think one (a correction) is coming.’
Let’s step back just a bit, and look at stock price performance not in the last 6 weeks, but in the last 52. The last 6 weeks (roughly outlined in red in the chart below), are small movements in the scheme of the longer trends. The US market is up 20% in the last 12 months (not calendar 2013!), International markets are up about 12%, and Emerging Markets stocks are down about 10%. From here, a correction takes away about half of last year’s gains for the US market, most of last year’s gain for developed International markets, and doubles the year’s losses for Emerging Markets.
Now, let’s step back one more time, and look at the last 10 years. On this chart, I’ve again roughly outlined the last 6 weeks in red, and the last year in blue. The last 6 weeks looks like a blip, and even the last year is just a fragment of the story. Over the 10 years, the US stock market is up a bit more than 50%, and Developed International market stocks are up just under 50%. Emerging Market stocks are up just over 100%. On this chart, a correction represents only about 20% of the gains for the US market and Developed International market over the last ten years and only about 10% of the gain for Emerging Markets.
Every time you are tempted to figure out how to adjust your investments based on the stock market’s recent performance or the opinions on the stock market page of your favorite business or personal finance publication or website, I suggest that you remind yourself about the last chart in this note. The long trend may be up or down, but six weeks or even six months is unlikely to be determinative.
Wait, what about 2007-2009? That crash dropped US stocks about 50%, and Emerging Markets and Developed International stocks by about 60%. True enough. However, at the bottom, US and Developed International stocks were only 25% below their 2004 levels, and Emerging Markets were still above 2004 levels, if only slightly.
My point is not that you can’t or won’t gain or lose a lot of money in the stock market in a short time, especially if you get to pick the starting and ending dates. Rather, taking a long-term perspective puts everything into, well, perspective. A 30% gain or a 50% loss in one year is certainly exciting (and the loss exciting not in a good way). Over the long haul, however, smaller gains or even losses tend to follow big gains. Conversely, smaller losses or even gains tend to follow big losses. We tend to focus on the short-term, but we invest and save for a lifetime.