Fear the Bear or Buy the Bear? Charting the S&P 500

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What a year 2022 has been.

Investors have endured one of the worst stock-market starts to a year in several decades. The Nasdaq has seen its worst 100-session start to a year in its history. And it has now suffered a larger peak-to-trough decline than it did during the 2020 selloff — 33.8% vs. 32.6%, respectively.

Obviously, with a third of the Nasdaq’s value wiped out and the S&P 500 down more than 20% from its 2022 peak, many individual names have suffered a much worse fate.

Quality stocks are down anywhere between 30% and 50%. High-growth stocks have crashed, some by 70% to 80% or more.

The ripples have been felt outside equities as well. Cryptocurrencies like bitcoin are down 70% from the high (although it’s near key support), while bonds, which were supposed to be safe-haven assets, have been obliterated.

Case in point: The iShares 20+ Year Treasury Bond ETF  (TLT) – Get iShares 20+ Year Treasury Bond ETF Report is down about 40% from the highs, its largest peak-to-trough decline ever. The previous largest decline was a drop of 29.1%.

Regardless, let’s keep our focus on the stock market. Despite the very clear bear market we’re in right now, these types of declines can often be opportunities.

I’m not talking about just the past 12 years, when the Federal Reserve mostly had the bulls’ back (incidentally, it’s a big day for the Fed as well). I’m talking about the long term.

The Long-Term Stats Favor the Bulls

Yearly chart of the S&P 500.

Chart courtesy of TradingView.com

Look at the annual chart above, which clearly lays out the long-term trend and measures all the way back to 1942. That gives us 80 years of market data to parse.

In that span, we’ve seen the S&P 500 climb in 60 out of 80 years, good for a win-rate of 75%. If we include dividends — why wouldn’t we? — the record climbs to 64 up-years out of the prior 80, giving us a win-rate of 80%.

Further, we have the win-rates for the last 20, 30, 40 and 50 years, which are 85%, 83.3%, 85% and 80% respectively.

So it’s a fairly consistent expectation for the S&P 500 to rise about 80% of the time on an annual basis, or about eight out of every 10 years.

Size Matters

It’s not just the win rates that we’re focused on. It’s also the size of the wins and losses.

Excluding dividends, the years where the S&P 500 posts a gain of 0.5% or more — which skips two years in which the index was flat — the average annual gain is 17.2%. When we include dividends, the average annual gain climbs to 19.6%.

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Conversely, the years in which the S&P 500 posts an annual loss, the average decline sits at just 12%.

You can be sure that no casino in Las Vegas offers you odds to make money like these.

The S&P 500 is down 20.75% so far this year. If the year were to end today, it would mark the index’s fourth-worst performance in the past 80 years. Only 1974, 2001 and 2008 would be worse.

But it’s also worth pointing out that the S&P 500 has declined in three straight years only once: in 2000 to 2002. On the flip side, it’s rallied in three straight years (or more) 11 times during the same span.

In fact, we’ve had two stretches of nine straight annual gains and one stretch of eight straight yearly gains.

Lastly, in 10 of the 16 years where the S&P 500 finishes lower, the index declined by 10% or less. So there’s some comfort in that as well.

The Bottom Line: Don’t Be Scared

To sum up, the S&P 500 has been a rather favorable investment machine for the past eight decades.

Long-term investors can relish the facts that the stock market wins far more than it loses, and on average it gains more in the up years than it loses in the down years.

Think of it like this:

You sit down with someone who offers a straightforward bet: They’ll flip a coin. If it’s heads, they’ll pay you $100. If it’s tails, you pay them $60. The only “catch” is that the coin lands on heads 80% of the time.

Would you play? Of course you would!

It doesn’t mean the S&P 500 can’t go down further this year or decline in 2023. It could do both those things and decline in 2024, too. 

The odds don’t say it’s impossible, but they do say it’s unlikely. 

In that sense, investors who make regular contributions to stock funds — say, for retirement — shouldn’t stop in the down years because they’re scared. 

The down years reduce investors’ cost basis and enable them to ride the market higher once the turmoil comes to an end and the long-term trend resumes.