Selling stocks now? History objects!

The Sound of Silence

The sound of silence has been prevalent in many offices as of late. Workplaces once buzzing with vibrant energy have become reduced to empty spaces with a lingering calm. On the advice of authorities and employers, many Norwegians have opted to work from home. For those with children, who are also staying home due to closed schools and kindergartens, everyday life has become more noisy and chaotic than usual.

The same can be said about the stock market. This has been a very demanding month for investors in all types of securities. In a time when the world has come to a halt, there are few if any markets that benefit. It is difficult to find bright spots when known and loved ones are being laid off, markets are plunging, and the shelves for toilet paper in supermarkets are empty.

From a historic point of view, however, now would be a bad time to sell your stocks.

How far have we fallen and how far can it fall from here?

At the time of writing, the American stock exchange S&P500 has fallen 34% (in USD) from top to bottom. It’s only been 4 days since we entered into a bear market. Since World War II there have been 12 (now 13) bear markets and only 5 (now 6) where the index has declined more than 30%.

In these five erstwhile periods, from the time they drop pushed below 30% from the top, the index fell – on average – another 19%. The range of outcomes, however, is quite large. The lowest decline was another 1%, while the biggest was another 36% (the global financial crisis). Historically, there is thusly little that suggests we have reached the bottom just yet. On average, the fall from top to bottom (in this admittedly small sample) lasts for 18 months.

What’s more interesting is to look at the average return for the index 6 months, 12 months, 18 months and 24 months, respectively, after the drop has pushed below 30%. What can history tell us about the average return for the months ahead?

Looking at the table above, we can see that from the time the index crossed the 30% drop-threshold, the average return is 3.1% 6 months after. The range of outcomes is large. It varies from -20% (the global financial crisis) to +21% (Black Monday in 1987). The majority of the periods, however, had a positive return after 6 months.

After 12 months, the average return was high: if you bought the S&P500 index the day it ended 30% below its top, you would have an average return of 13.3% after one year. Again the range of outcomes is large (it varies from -15% to +34%). While the range of outcomes is wide, the main difference from the shorter 6-month period is that there is only one period in the sample where the return was negative after 12 months, and that was after the dotcom-bubble of 2000.

The reading gets even lighter and more positive if you look at the return after 18 and 24 months. After 18 months, your average return would be 20.5%. After 24 months, your average return would be 35%. After 24 months, there is also not a single period with negative returns.

Since history shows there may be further downside from here, one can always argue that it would be better to wait until we see a bottom before buying. The problem is that we never know when we have reached a bottom. Humans are flawed, and we tend to let emotions drive our investment decisions. When we let feelings determine when to buy and when to sell, we tend to make rash and poor judgments. We tend to perform poorly.

Naturally, an asset manager will rarely – if ever – recommend that you sell. Normally, an asset manager will recommend that you buy. Currently, however, it is difficult to buy. These are unprecedented times and many of us worry about our future job prospects. When we are feeling the pinch, we naturally tend to save rather than spend, and have cash at hand rather than invest. For those who can afford to remain invested in the markets, however, this is – historically speaking – rarely a good time to sell. Au contraire! For those who can afford, it is rather an opportunity to buy.

All crises have different traits. It is very difficult to predict whether the aftermath of this crisis will be greater in extent than e.g. the one we observed following the financial crisis. Even though the current crisis appears more dramatic, both central banks and governments have been extremely quick in implementing stimulus, and very adamant they will do whatever it takes to ensure that the economic slump that will follow is not long-lasting.

Hopefully, the stimulus will contribute to helping out all those affected by this crisis in the months to come. Hopefully, it will help investors who are in it for the long term. Hopefully, it will help us out of this darkness so that the sound of silence is not as deafening as it is now.

Disclaimer: Nothing contained on this website constitutes investment advice or other advice, nor is anything on this website a recommendation to invest in our Funds, any security, or any other instrument. The funds mentioned may not be available in the markets you represent. The information on this blog is posted solely based on sharing insight to make our readers capable of making their own investment decisions. Should you have any queries about the investment funds or markets referred to on this website, you should contact your financial adviser.