Get Ready for Big Swing

The S&P 500 lost close to 9% last month – the worst January on record. If we annualized it, this could mean a full-year loss for the market of about 75%. The big question right not is whether we will go even lower than that.

The worst two bear markets in the S&P 500 both occurred in the 1930s – (i) from 1929-1932 which sending stocks down 86% and (ii) between 1937 and 1938 – which producing a 54% loss from peak to trough.

In current cycle, the S&P 500’s November low was 752, which translated to a peak-to-trough loss of 52%. This qualifies the current downturn to be the third worst in modern stock market history, though not as bad as either of the Great Depression bears.

We have to be mindful that this decline took just 13 months and typically, a market loss of 40% would take about 21 months. So, the speed of the decline was a typically fast. It practically erased every single penny of the 2002-2007 bull market’s advance.

While I would not discount the possibility that things could get much worse, one thing that I am very sure is that when the carnage is over, you can expect swift and substantial gains from being little bit of less risk adverse. On average, the first year of a bull market has produced a gain of 46% for the S&P 500 and for the average 57 months ahead, the average bull market produces an overall gain of 164%.

While the world’s leaders gathered at Davos, Switzerland are blaming one another for their economic woes last week, the odd of investing now into building a diversified portfolio of quality companies and those that pursuing dollar-cost averaging strategies throughout this downturn, I believe, are still very likely for a solid return.