May 17, 2022
With the S&P 500 Index in correction territory (down more than 10% from the previous peak) investor anxiety levels are understandably elevated. The market faces a number of threats, including inflation, a hawkish Federal Reserve, soaring yields, and war in Eastern Europe. During volatile markets, it’s difficult to focus on anything beyond the short term, but at times like this, studying market history for reminders of the benefits of long-term investing can be helpful for investors.
First, simply put, stocks have gone up over time as shown in the chart below. Based on this 122-year data series of the Dow Jones Industrials, stocks have gained 9.5% annualized, including dividends. That’s a pretty good long-term track record.
So what has driven those big gains for stocks all those years? Earnings, plain and simple. While we don’t have 122 years of earnings data for the Dow, we do have 70 years of S&P 500 earnings per share (EPS) data, shown in the chart below. Earnings have grown at an annualized pace of 7.5% over this time period, consistent with long-term stock price appreciation (excluding dividends).
Though the S&P 500 Index is unmanaged and can’t be owned directly, it’s clear that owning stocks for the long-run has been very rewarding. Moving in and out of the market and potentially missing out on gains can be costly. Stocks experienced some significant downdrafts during the 31-year period shown in the chart (2000-2002 and 2008-2009 to be specific) and yet the S&P 500 Index still rose an average of 9.9% per year during that time.
This has helped us put the latest bout of volatility in perspective and remind us of the benefits of long-term investing. Bottom line, be patient, stick to your plan, and if you have a long-term time horizon with a relatively conservative asset allocation, this might not be a bad time to consider adding some equities.
Please reach out with any questions.