We don’t want to downplay the near-term risks related to the COVID-19 outbreak. Global growth is anticipated to slow significantly and some economies may get tipped into recession, including ours. There are factors surrounding this market downturn that are unique, which makes history less of a guide. But there are definite similarities to past downturns. Investor time horizons have shortened and tunnel vision appears to be setting in. For many, worst case scenarios become the de facto forecast by which long-term investment decisions get made. And attractive values are getting overlooked in favor of more expensive safety. In a market downturn having cash and a long-term perspective are competitive advantages. Even if you don’t have cash it is probable that your allocation to risk assets has moved below target.
History has demonstrated that long-term investors are best served by staying focused on their long-term strategic goals. Risk assets like equities are meant for long-term investors because they historically have provided higher returns than lower risk assets and because they can be very volatile in the short term. As a demonstration of how volatile the stock market can be, from the S&P 500 Index market high on February 19, 2020, it took just 15 trading days to fall 27 percent and enter a bear market. Despite this fall, and partly because of this fall we would suggest that the longer-term return prospects for equities have not changed relative to other safer asset classes.
Bull & Bear Markets Since 1928
S&P 500® Index cycle returns: 1928 through February 2020
Source: Bloomberg (based on daily closing prices)
Why Don't We Time the Market?
Why is market timing so hard? Maybe it is because the majority of the return in the bull market straddles a bear market. Market timers risk sacrificing the most beneficial portions of a bull market even if they slightly misjudge the market peak and trough.
S&P 500® Index Full Bull Market Total Return
Allocation by Quartile Since 1935
A bull market cycle as one that covers a period of time where the equity market (as measured by the S&P 500® Index) rises at least 50 percent from the trough and lasts until the next bear market begins. The bull market cycle spans from the previous bear market trough to bull market peak. A bear market cycle as one that covers a period of time where the equity market (as measured by the S&P 500® Index) falls at least 20 percent from a peak and does not recover for at least three months. The trough is established by the start of the next bull market. The bear market captures the period between the market peak and trough.
The information provided represents Touchstone’s views and observations regarding past and current market conditions and investor behaviors. The information and statements provided here are believed to be true and accurate. There can be no assurance however that the beliefs expressed herein will be consistent with future market conditions and investor behaviors.
This commentary is for informational purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation to buy, sell or hold any security. Investing in an index is not possible. Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results.
S&P 500 Index is a group of 500 widely held stocks and is commonly regarded to be representative of the large capitalization stock universe.
The indexes mentioned are unmanaged statistical composites of stock market or bond market performance. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Past performance is no guarantee of future results. Active Share is not a performance measurement. A high level of Active Share does not assure outperformance of a fund relative to its benchmark index.
Investing in an index is not possible. Investing involves risk, including the possible loss of principal and fluctuation of value. Please visit touchstoneinvestments.com for performance information current to the most recent month-end.
Not FDIC Insured | No Bank Guarantee | May Lose Value