The Market Just Took a Beating … and That’s Good

The Market Just Took a Beating … and That’s Good

The past week has been tough for investors.

You don’t need me to tell you that.

On Monday, the S&P 500 Index fell more than 3%. The next day, it suffered another 3% drop.

Through Wednesday, the S&P 500 fell 6 out of 7 days in a row. And 8%.

The market hadn’t fallen that much since the end of 2018.

You can see that in this chart:

December 2018 and February 2020 Are Historic Drops

I went back through 40 years of S&P 500 closing prices. What I found might surprise you … in a good way.

But there’s a silver lining to this weakness.

I wondered what it meant in terms of history. So I did some digging.

I went back through 40 years of S&P 500 closing prices.

What I found might surprise you … in a good way.

Today’s Uniqueness Leads to a Bright Side

The S&P 500’s drops on Monday and Tuesday erased $1.7 trillion of market value.

This is rare, folks. The market has fallen 3% or more two days in a row only 10 other times in the past four decades.

That’s more than 10,000 two-day periods!

We had Black Monday in 1987 and the continuance of the dot-com bust in 2002.

The market fell 3% or more on five two-day periods during the financial crisis in 2008. It also happened during the market sell-offs of 2011 and 2015.

But what followed was positive.

Take a look at the market returns after each of those periods of weakness:

Market Returns Following 2-Day Sell-Offs

I went back through 40 years of S&P 500 closing prices. What I found might surprise you … in a good way.

(Source: Bloomberg, internal analysis)

In every case, the market was higher a year later.

And more than half the time, the market was higher one, two, three, six and 12 months later.

(As you can see, the only cases when the market was lower was during the later stages of the financial crisis. It was a longer-than-normal sell-off.)

On average, the market was 7% higher after six months. And it was 23% higher after 12 months.

We can take advantage of this…

Watch the Market and Be Ready

The market’s currently weak.

You don’t have to hurry out and buy right this moment. Prices could fall more.

You should take a deep breath … then let stocks bottom and begin to move higher.

The negative returns in 2008 happened because the market continued to fall. It takes some patience.

In 2002, the market took 79 days to bottom after its two-day weakness.

But know prices can bottom sooner than you expect, too.

In 2015, the market bottomed the day after its weakness. In 1998, it bottomed seven days later.

So watch the market … and be ready.

Federal Reserve Chairman Jerome Powell will provide support if he feels it’s necessary.

Wall Street currently forecasts a 62% chance of a Fed funds rate cut at the March 18 meeting. That’s up from an 8% chance last Friday.

That would help the market bottom, too.

Your Action to Take

When the market reverses, you don’t have to be a hero.

Keep it simple and buy the market.

The SPDR S&P 500 ETF Trust (NYSE: SPY) or the Vanguard S&P 500 ETF (NYSE: VOO) are exchange-traded funds (ETF) with low expense ratios that will do the trick.

You can earn up to 45% in a year with these ETFs.

Good investing,

Brian Christopher

Editor, Profit Line