US sharemarket volatility normal, long-term gains remain strong

Despite global setbacks, the market still has a flawless track record of recovering and moving on to bigger and better things, writes Mark Lister.

• Intra-year sharemarket drawdowns of at least 5% are common, occurring in 93% of years since 1950.
• US shares have delivered positive returns in 59 out of 76 years, with an average annual return of 11%.
• Volatility is normal, with markets historically recovering and performing well long-term despite challenges.

Intra-year sharemarket drawdowns (that’s financial jargon for the peak to trough decline) like the one we saw in March and April aren’t uncommon.

In fact, a fall of at least 5% at some point during any given year is extremely likely.

In the 76 calendar years since 1950, there have been just five occasions where we haven’t seen that.

During the other 71 years (so 93% of the time) the United States S&P 500 index has at some point found itself at least 5% below its peak of the previous 12 months.

We’ve seen double-digit drawdowns in almost two-thirds of years, and the average decline for all years since 1950 has been 16.1%.

I suspect that’s higher than many would’ve expected, and it isn’t a world away from the 18.9% fall the index suffered this year at its weakest point.

That’s not to say there’s no chance US shares won’t weaken again, even though they’ve recovered strongly in recent weeks.

They might, but my point is that while the reasons behind them are always different, declines like this are par for the course.

Since 1950 US shares have delivered positive returns in 59 out of 76 years.

That’s a 78% hit rate, but even in those up years the average drawdown was still 13.5%.

Volatility is the rule, rather than the exception, and financial markets have historically performed very well in the long term in spite of this.

Over those almost eight decades the S&P 500 (including dividends that were reinvested, rather than spent) has delivered a highly impressive annual return of 11%.

The world has thrown countless curveballs at investors during that time.

Even just in the past 30 years, we’ve had the September 11 terrorist attacks, numerous wars, a US housing crash, a global pandemic, the biggest inflation spike in four decades and three recessions.

I can point to 15 examples over that period where the S&P 500 fell by more than 10%, including seven where it was down more heavily than this year.

On two of those occasions, the US sharemarket was cut in half, sinking close to 50%.

Some of the challenges the world is grappling with right now will be unnerving, particularly for newer investors who haven’t experienced these periods before.

But the truth is, at any given time there is always a long list of things to fret about, and plenty of reasons to sell.

Today it’s US trade policy and what that might do to economic activity and corporate earnings, while five years ago it was the pandemic.

Before that, we had Brexit, a slumping Chinese economy, the European debt crisis and numerous US government shutdowns.

Go back further and you’ll find the GFC, the dotcom bubble, and the Asian banking crisis.

Between those events, it might simply be overheated house prices or share markets, where values fall just because they went up too much in the lead-up.

Despite all of that (and everything else I haven’t mentioned), the market still has a flawless track record of recovering and moving on to bigger and better things.

Financial author Morgan Housel said it best, noting that the reward is superior long-term returns and volatility is the price of admission.

Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.