Let me just say it: The past seven weeks have been a challenge if you're an investor. Regardless of whether you've been investing for a couple of months or upwards of 50 years, your resolve has certainly been tested by the expediency of the stock market's recent decline.
Both health-related and economic uncertainties tied to the spread of the coronavirus disease 2019 wound up pushing the Dow Jones Industrial Average (^DJI -0.77%) into bear market territory (defined as a non-rounded drop of at least 20%) in a mere 16 trading sessions. The previous record for the fastest descent into bear market territory came during the Great Crash of the Depression Era, which took 35 trading days to accomplish.
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It also wound up taking just 33 calendar days to shave off almost 34% from the benchmark S&P 500 (^GSPC -1.11%). On average, bear markets that end up losing 30% of their value have taken 336 calendar days to accomplish this feat. The S&P 500 did so in a tenth of the time.
There's no question the velocity of this decline and the unprecedented mitigation measures being undertaken to slow the transmission of COVID-19 are giving investors reasons to holster their cash. But make no mistake about it, investing your disposable cash into the stock market right now is going to be an exceptionally smart decision over the long run. Here are seven reasons why.
1. Historical return data is in your favor
To begin with, the stock market indexes expand in value over time. This has to do with global economies growing in size, and high-quality businesses reaping the reward of this growth via higher net income.
Historically, the stock market has increased in value by 7% per year, inclusive of dividends and when adjusted for inflation. This means, even taking into account the numerous stock market corrections and bear markets that have been recorded, the average long-term investor can expect to double their money about once a decade.
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2. Rolling 20-year S&P 500 return data is batting 1.000
Rolling 20-year return data for the S&P 500 also conclusively shows that, regardless of when you buy into the stock market, you'll make money -- with the catch being that investors have to hold for at least 20 years.
Assuming you purchased a perfect S&P 500 tracking index, only two years over the last 100 (1948 and 1949) have featured 20-year rolling returns of less than 5% per year, inclusive of dividends. Comparatively, there are more than 40 years over the past 100 years where your average annual return over a rolling 20-year clip would be at least 10%, and 20 years where it would have hit at least 13%, per Crestmont Research.
Literally -- and I do mean literally -- any 20-year rolling period in the S&P 500 generates a profit for long-term investors.
3. The average bear market since 1950 has lasted only 428 calendar days
According to data from market analytics company Yardeni Research, there have been 38 corrections of at least 10% in the S&P 500 since the beginning of 1950, and 10 instances of official bear markets. Not counting out current bear market, it's taken an average of 428 calendar days for the previous nine bear markets to go from peak to trough. If, somehow, we've already hit bottom in our current bear market, this average would decline to 389 days.
The point is that, even though the stock market has spent a little over 10 cumulative years descending from its highs into bear market territory since the beginning of 1950, it's spent the vast majority of the other 60 years moving sideways or pushing higher. There's a very clear long-term upward bias in the stock market.
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4. Many of the biggest single-day gains in history have occurred during bear markets
Although running for the hills might sound palatable given the record-breaking volatility we've witnessed of late, it wouldn't be a prudent idea. That's because many of the stock market's biggest single-day point and percentage gains have often occurred within close proximity to its worst days.
What's more, many of these top-performing days occur during bear markets. Thus, if you bide your time on the sidelines hoping for the volatility to pass, it's almost assured that you'll miss a significant portion of the bounce back from the lows.
5. We're at a seven-year low on the Shiller price-to-earnings ratio
If fundamental metrics are your thing, you should know that the Shiller price-to-earnings ratio -- a P/E ratio based on average inflation-adjusted earnings from the previous 10 years -- is down to about 23. Prior to the coronavirus cash, it was north of 32, marking only the fourth expansion in history it had crossed above 30.
While a Shiller P/E of 23 isn't historically cheap (the 150-year average is closer to 17), it does mark the lowest valuation for the S&P 500 since early 2013. It just so happens that this is the approximate Shiller P/E range where the S&P 500 bounced following the dot-com bubble.
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6. Lending rates are back at historic lows
On a broader note, don't overlook the fact that the Federal Reserve has moved its federal funds rate back to an all-time low range of 0% to 0.25%.
One of the key reasons the recently ended (but longest) bull market in history thrived was corporate access to cheap capital. The Fed may not have the same amount of firepower with this potential recession than it's had with previous recessions, but low lending rates should nevertheless be an impetus for a robust bull market to come.
7. The stock market bottoms well before the economy does
Finally, you should understand that the stock market pretty much always winds up bottoming well before the U.S. economy and/or economic data hits its trough. Similar to waiting out volatility on the sidelines and missing out on a vigorous rebound, investors waiting for better economic data to emerge could risk missing out on a substantial bounce in the Dow Jones and S&P 500.
The data is in agreement: You're smart if you're ignoring near-term volatility and choosing to put your money to work in the stock market right now.
