This week some clients have expressed concern with the recent market volatility and impasse in Washington D.C. Although the debt ceiling debate may have been delayed to mid-December, we expect continuing conflict and choppy markets through the end of the year. We understand the underlying worry that comes with market fluctuations and wanted to take the opportunity to share our thoughts with everyone.
Almost all investment accounts that have stock market exposure have lost value in recent weeks due to a number of factors. The political posturing over the debt ceiling is certainly a contributing factor, but there are others as well: fear of continued inflation, supply chain concerns, the potential for the Fed to raise interest rates sooner than expected, enduring COVID-19 concerns as we head into winter, unemployment remaining high despite job vacancies going unfilled, legislative uncertainty around the infrastructure spending and potential tax code changes, etc. etc. All of these issues are causing uncertainty and downward pressure on global stock markets.
Now, that being said, it doesn’t mean that this is a reason to panic. As investors, we should expect to see market increases and pullbacks. Below is a chart1 of the world stock market from 1987 – 2020 as a backdrop among all market crises during that timeframe, which are denoted in pink. The chart illustrates that there have always been geopolitical or economic issues throughout history – some of them quite scary.
However, we do muddle through them, and the stock market recovers. Sometimes this happens very quickly, like in 2020 when the stock market bounced back much sooner than anyone expected after the initial panic about the global pandemic. Sometimes it takes a while, like in the Great Recession / housing crisis of 2008 - 2009. [However, it should be noted that the market did regain much of its losses after that crisis rather quickly. But, it took a few years to get all the way back to even with the previous market highs.]
On average, the S&P 500 typically sees a 5% decline three times each year as referenced in the chart below. However, the first 5% decline of 2021 didn't happen until October 5th. This created stress that hasn't been felt in some time. The chart below helps to remind us that market declines are a normal part of the investment cycle.
The moral of the story: There is always uncertainty in the world that affects stock markets and a temptation to believe as though "this time is different." History has proven that stock and bond markets have recovered 100% of the time and gone on to reach new highs. Riding through these tumultuous times is what ultimately rewards investors.
1 Sources: MSCI, RIMES. As of 6/30/21. Data is indexed to 100 on 1/1/87, based on MSCI World Index from 1/1/87-12/31/87, MSCI ACWI gross returns from 1/1/88-12/31/00, and MSCI ACWI net returns thereafter. Shown on a logarithmic scale. Returns are in USD.