Where does the market go from here?
The U.S. stock market finally flaunted its worse half. For a good part of 2020 and all of 2021, U.S. stocks largely trudged ever higher with very few drops in value. It made investing look easy.
That changed in 2022.
Investors have been reminded in the last three months that stocks can travel in two opposing directions. It doesn’t always go up. With inflation spiking, Ukraine at war, and interest rates rising, the stock market returned to its bipolar ways.
If you haven’t paid attention, here’s a high-level overview of what’s happened in the market this year. For our purposes, we’re going to use the S&P 500 as our definition of the market. The S&P 500 is a group of 500 of the largest publicly traded companies in the U.S.
The market peaked on Jan. 3. It then swiftly dropped to a low on March 8. At that point, the market was down 13 percent from the high point on Jan. 3. Since the March 8 low, the market has rallied. We are now 8 percent higher from that bottom. But the stock market is still down 6 percent for the year.
So, at the worst point this year, the market was down 13 percent. That’s never fun. And it seemed particularly worrisome, likely because the market has been smooth sailing for so long.
But you might be surprised to know that the decline we experienced a few weeks ago was far from unique. In fact, it was perfectly normal.
If we look back at the last 42 years, the largest drop in price from peak to trough for the market in any given calendar year has been a drop of – this is no joke – exactly 13 percent. In other words, what we witnessed thus far in 2022 is average. Expected. Normal.
To be honest, given the circumstances, I am surprised the downside hasn’t been worse.
So, with that said, where will stocks go from here? I have a prediction.
Here it is: They will either go up or down. How’s that for advice?
The more nuanced answer is that it depends on your timeframe. If you are asking over the next month, I have no idea. Over the next year? Still, no clue. Over the next five years? I’d say there is a 50-50 chance the market is higher. Over the next ten years? There’s a strong probability the market is higher. Over the next 20 years? No question the U.S. stock market is more valuable than it is today – if not, the world has endured a set of events that makes your portfolio irrelevant.
What has transpired in 2022, fortunately, can be put to good use. We can use the market’s movements to gauge the appropriateness of your current investment portfolio. Think of that 13 percent drop in value as a test. The critical question is how did you react to that test?
There are three possible ways you responded: (1) I saw the drop and it didn’t bother me; (2) I saw the drop and I was concerned about my portfolio; and (3) I had no idea the market even fell.
I’m going to focus on those who fell into the second camp.
If you are in the second camp, your portfolio needs immediate attention. You should strongly consider moving to a more conservative mix of investments. Why? Because what we witnessed from the stock market in 2022 is routine. In fact, as the data shows, it should be expected.
If you were concerned about your portfolio in February and early March, that’s a clear sign your portfolio is too aggressive. Given that the market is now 8 percent higher than the March 8 low, now is a wonderful time to make a change.
Because one thing is for certain: The market can get a lot uglier. And you should be prepared for that to happen.
Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at [email protected]
This column is paid for by Invisor.