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Less than a month ago it looked like the stock market was on the mend. After falling by nearly 12% between January’s peak and March’s trough due to rekindled pandemic worries and Russia’s invasion of Ukraine, the Dow Jones Industrial Average‘s (DJINDICES: ^DJI) 8% rally back from that low was viewed as a ray of hope. But its 6% pullback from that late-March peak has investors questioning their outlooks again.
Is this weakness temporary, or is it a harbinger of bigger declines to come? Before you consider the answer to that question, it might be useful to first ask: What if the premise of that question itself is flawed?
Image source: Getty Images.
No Wall Street setback of any size has proven permanent yet
It’s not exactly a secret that it’s a better strategy to buy good stocks while they’re “on sale” than it is to pay full price for them. It’s also largely understood that even the stocks of strong companies can be dragged lower when the market’s tide turns bearish. That’s why plenty of investors today are understandably worried that Wall Street and the economy may have more downside left to dish out.
The best advice anyone could give or get on that front is this: Nobody has a clue what awaits us in the near future.
Disappointed? Don’t be. While the future may be unpredictable, the future in question isn’t a particularly distant one. The questions most investors seem to be seeking answers for at this time involve short-term issues that don’t really matter. The bigger, more important questions for investors are always the long-term ones, and though we can’t predict the further future with any real precision either, we can play some stunningly reliable odds.
The charts below look more complicated than they really are. Simply put, each is a look at the Dow Jones Industrial Average’s rolling return for key, long-term time frames — comparing the Dow on any given day to where it was 10 years prior, five years prior, three years prior, and one year prior, and tracking those comparisons all the way back to the early 1900s.
Clear as mud? Don’t sweat it. It’ll make a lot more sense when you see them, beginning with the Dow’s 10-year returns going back to 1910. The average 10-year performance across that time frame was just a hair above 90%, or 9% per year.
Data source: Thomson Reuters. Chart by author.
That’s not the key point of showing you the chart, however. Far more important to us is the fact there was only one period in the 21st century when the Dow was trading lower than it had been 10 years prior. That was in 2009, following the subprime mortgage meltdown and the financial crisis. And, even then, the Dow didn’t stay in the red on this metric for very long. It then bounced back to almost reclaim the sort of long-term gains investors were enjoying during the technology boom of the 1990s. Beyond that, the last time the Dow suffered negative 10-year returns was back in the 1970s when surging inflation was wreaking havoc that nothing seemed capable of curbing. Before that, you have to go back to the fallout from the Great Depression to find a 10-year span that was ultimately a loser.
As you might suspect, shortening the rolling return for the Dow to a 5-year span gives us a few more dips into the red — though not significantly more. And again, those weak patches were fairly short-lived.
Data source: Thomson Reuters. Chart by author.
Shortening the Dow’s rolling return all the way down to only three years gives us a few more periods where the blue-chip index slipped into the red. Again though, all of these instances were short-lived, and the Dow Jones Industrial Average more than recovered from each — in all cases eventually bouncing back to set new record highs.
Data source: Thomson Reuters. Chart by author.
The point is, short-term turbulence can occasionally lead to long-term losses for the broad market. Those long-term losses are relatively rare though, and become rarer the longer your time frame is. Moreover, the U.S. stock market has always bounced back from even the most painful of pullbacks with even bigger gains.
The key, of course, is that investors have to be patient.
Stay focused on what you can reasonably predict
These charts don’t actually answer the headline question here: Is it safe to buy into the Dow or its weakest stocks now that the index is down 6% from last month’s peak? The answer from above hasn’t changed. We don’t know, nor do we entirely care. We can’t navigate the short-term ebbs and flows because they’re usually emotionally charged and always difficult to predict. These market-wide swings won’t impact stocks for the long haul though, which is why — as the charts above illustrate — we can feel confident about buying and holding stocks for the long haul, regardless of the current backdrop.
If you just have to see it, though, here’s the chart of the Dow’s 1-year rolling returns going all the way back to 1901. The index’s 12-month performances have been in the red nearly half the time during this period. Each of those setbacks was unpredictable, and none of them really mattered to investors who were operating with a true long-term time frame.
That bears repeating: None of these 1-year dips really mattered to investors with a true long-term time frame. Heck, a year from now, most investors won’t be able to remember or even care if now was the right time to step in. Nothing new there.
Data source: Thomson Reuters. Chart by author.
The moral of the story? Don’t bother fishing for what looks like a market bottom — nor, for that matter, a market top. Stay focused on what’s predictable and, if nothing else, supported by the statistical odds — the market’s bullish long-term trajectory.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
