Regardless of what the market has thrown our way–bulls, bears, corrections, sell-offs, you name it–one of Cabot’s central tenets over our 55-year history has been to remain optimistic about the stock market.
Over those many decades, we have seen a lot of ups and downs, and while history rarely repeats itself exactly, it often rhymes, as we like to say.
Looking back allows us to regain a sense of perspective when market volatility spikes higher.
To that end, I’d like to share the following chart. It shows the depths of intra-year declines in the S&P 500 in the years 1995-2024, as well as the final returns for the calendar year.
The red bars are the maximum intra-year decline on the S&P 500, and the blue (and purple) bars represent the percentage change for the full year.
As you can see, in almost every year, the S&P 500 experienced a significant intra-year decline but finished the year with a positive return (77% of the time, or 23 out of 30 times).
A handful of major crisis years such as 2000–2002 (dotcom bust), 2008 (financial crisis), and 2022 (inflation and rate hikes) show both deep intra-year declines and negative annual returns.
Years like 2020 (pandemic) had a sharp intra-year drop but finished with a strong positive return, highlighting the market’s resilience and recovery potential.
The average intra-year decline over the last 30 years is about -14%, even though the average annual return of the S&P 500 during that time is 10.4% (more if you include reinvestment of dividends), underscoring that volatility is normal even in positive years.
All of this is to say, the correction and volatility that we’re finally putting behind us doesn’t mean this year will be a loser.
When faced with unexpected volatility, many investors are tempted to pull their money out and wait until things settle down.
Understandable. But a mistake. Here’s why you should stay invested instead.
3 Reasons to Stay Invested
- Avoid Locking in Losses
In their haste to get out of a falling market, investors often sell at a loss. As a practical matter, by the time most of us realize there’s a problem, it’s too late to get out without a loss. Less-savvy investors tend to hesitate as well and are punished with even greater losses.
- It’s Easy to Miss the Rebound
The best returns often closely follow steep declines.
For example, 2009’s 26.46% gain followed right on the heels of 2008’s 37.00% drop, and many of the best trading days followed within a week or two of the worst trading days.
In fact, we’re seeing that play out even as you read this, as the major indexes have already reversed the worst of their March and April selling.
- Locking in Losses and Missing Rebounds Compound
One year of missed participation can significantly reduce your long-term wealth.
To illustrate how this works, let’s look at a hypothetical $100 investment made in 1995. An investor who stayed fully invested through 2024 would have seen that investment grow to about $1,950 (10.4% annually).
The same investment made by someone who missed even a few of the top-performing days during that period – such as the post-March rally of 2020 – realized drastically reduced returns.
Missing the 10 best days in 20 years would have reduced total returns by about 50%. Adding in the panic selling to lock in losses and forfeiting the dividends that could be reinvested can further reduce returns by as much as 40%.
Ouch!
I hope I’ve at least helped keep some investors from shooting themselves in the foot.
But, before we part ways, I wanted to shed a little light on what’s coming out of Washington these days.
My regular readers know I do not believe in mixing politics and investing. Good investing is about drawing upon research, experience, and insights to make the best of whatever the market conditions. Politicians make policy, and investment analysts at Cabot figure out the implications of those policies – which industries, sectors, and stocks will benefit, or not.
As one reader recently reminded me, however, the primary drivers of market conditions are coming out of Washington right now.
As such, I wanted to review some of the economic developments and policies that are particularly relevant today.
First, removing trade barriers permits production to shift to areas with a relative advantage (cheaper labor, better climate, access to raw materials, educated workforce, etc.), raising standards of living.
Second, maintaining independent central banks that set interest rates and other monetary policies reduces the temptation for leaders to goose the economy for short-term advantage with long-term costs.
Third, tariffs are best thought of as a tax that increases costs and raises inflation, the cost of which falls disproportionately on small businesses and consumers. That said, well-implemented tariffs can help new businesses get a foothold in industries already dominated by other countries and can protect strategically important industries.
Lastly, the economy thrives in a stable, predictable environment. That allows businesses to continue to grow, supports the labor market (which helps improve consumer sentiment and, ultimately, spending) and promotes longer-term business planning (and the associated capital spending).
I will note that politicians and economists have often failed to account for those left behind when production shifts to areas of relative advantage. People, education and physical plants are not as fungible as capital and have a much harder time responding, let alone responding quickly, to free trade-driven changes. That has been a serious oversight with real economic, political and social consequences.
Even so, the announcement of widespread, and substantial, tariffs – particularly on our biggest trading partners, China, Canada, and Mexico – sent the stock market into a significant decline. The prospect of actions being taken to compromise the independence of the Federal Reserve Bank has only heightened concerns of economists, CEOs, and investors.
Some of the actions taken in the first three months of the administration can be undone, but some of the impacts will continue to reverberate. There is no going back. Now is the time to understand the new conditions and find the best path forward.
Will this experiment work to produce a better economy, measured by profits and standard of living for stakeholders? It’s too early for anyone to say with certainty.
What we can say with certainty is that investors are likely to face turbulence for the foreseeable future.
What to Do Now
Cabot doesn’t have a crystal ball any more than anyone else does.
What we do have is a solid understanding of finance, economics and the history of how markets have behaved in the past. And we follow all relevant market developments and Fed actions, participate in earnings calls, and watch what the institutional investors are doing.
As I tried to make clear in the first part of this post, history tells us that staying invested in the market, even in volatile or down markets, generally makes a difference in your investing performance. Often a substantial difference.
It is in these conditions that the insights and guidance of expert, professional investment analysts can make the biggest impact on your ultimate success.
I hope you will let Cabot be your guide to greater profits.
