Long-Term Perspective: Market Volatility is the Price of Admission for Investing

Chart of the Month
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

Photo Credit: Andy Li, Unsplash

The stock market had a strong start this year. The S&P 500 gained over +15% in the first six months, its 16th strongest first-half return since 1931. The equity market’s rise continued into early July, and the index set a new all-time closing high on July 16th. However, the stock market experienced increased volatility as it traded lower over the past few weeks. The selloff accelerated in the first week of August after a report showed unemployment rose to 4.3% in July, a nearly 3-year high. The recent volatility has been a notable change from the first half’s steady climb, with the S&P 500 at one point -8% below its all-time high from mid-July.

History shows that stock market drawdowns are a natural part of investing. The chart below graphs the S&P 500’s price return each year since 1990. The navy line shows the index has produced an average annual return of nearly +10%, but the bottom half of the graph shows a lot can happen within the market throughout the year. The red dots show the S&P 500’s biggest intra-year decline each year. Since 1990, 32 of 35 years have had an intra-year selloff of -5% or more. Nineteen years have had a selloff of -10% or more, with six years seeing a drawdown greater than -20%.

Stock market volatility is the price of admission for investing. In the short term, markets move in both directions as data changes and investors adjust to new information. In the long term, corporate earnings and economic growth influence the market. The recent market volatility appears inconsistent with recent earnings and economic data. With over 90% of companies reporting, S&P 500 earnings grew more than +10% year-over-year in the second quarter. Wall Street analysts expect an additional +10% earnings growth over the next 12 months. Unemployment is rising but remains low by historical standards. Consumer sentiment is improving as inflation eases and retail spending continues to grow. The chart below puts the recent volatility into perspective, and the market’s quick bounce back is a timely reminder of why we invest with a long-term mindset.


Historical S&P 500 Returns and Drawdowns by Calendar Year

 

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

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Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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