Investing Lesson 5: The Stock Market and the Economy are Different
Larry Swedroe, Director of Research, The BAM Alliance, 1/28/19.
Lesson 5: The stock market and the economy are two very different things.
2018 - It was the best of times, it was the worst of times. The U.S. economy continued to grow at a strong pace throughout the year, with second-quarter GDP growing 4.2%, third-quarter growing 3.4% and fourth-quarter growth expected to come in at 2.6%.
On the other hand, Christmas Eve saw the S&P 500 come very close to closing in bear market territory, putting the index down 19.8% from its Sept. 20 closing high of 2930.75. Clearly, the market and the economy were on divergent paths. What may surprise investors is that this is not unusual.
As Ben Carson pointed out in his October 2018 column, the S&P 500 has had 20 bear markets (down 20% or worse) and 27 corrections (down 10% but less than 20%) since 1928. The average losses saw stocks fall 24% and last 228 days from peak-to-trough. Carson noted that, of those 47 double-digit sell-offs, 31 occurred outside of a recession and didn’t happen in the lead-up to a recession—about two-thirds of the time, the market experienced a double-digit drawdown with no recession as the main cause. Of those 31 that occurred outside of a recession, the losses were -18% over 154 days, on average. This also demonstrates that the stock market is not a good indicator of a recession (Carson cited the old joke that the market has predicted nine of the last five recessions). In other words, there is nothing unusual about the recent performance of the market.
Carson also showed that, on average, the S&P 500 has been up 1% in the three months prior to the start of the 14 recessions since the one that began in August 1929. For those investors worried that the market’s recent drop foretells bad economic news, which might tempt them to abandon their plan and sell equities, the evidence should convince them that this is not likely to prove to be a good strategy.
- Investing Lesson 1: Active management is a loser’s game
- Investing Lesson 2: Diversification is always working; sometimes you like the results and sometimes you don’t
- Investing Lesson 3: The mistake of recency
- Investing Lesson 4: Your Discipline Will Be Tested
The BAM Alliance is an active community of more than 140 independent firms dedicated to delivering true wealth management. As Vermont's only member of the BAM Alliance, Copper Leaf Financial is very pleased to have access to all of the organization's resources and industry thought leaders including Larry Swedroe. Larry is the well-respected author of 16 books on personal finance, and has at times shared his insights directly with Copper Leaf clients.