There are long periods in history when the market moves higher on a trend basis, but there are also long periods when the market churns sideways, with large percentage declines and advances. This tends to lead to long-term investor frustration and disappointment with buy-and-hold strategies. It’s almost inevitable that the majority of investors will give up on the market during severe declines. Often, those investors are too traumatized by the experience to reenter those stock positions for the advance that follows.
A look at the long-term picture shows that the S&P 500 Index, although rising on a central trend basis over the last eight decades, has had to endure decade-long periods of essentially zero price advance. Within those broad ranges were some severe declines and advances. For example, from its peak in 1929, the S&P dropped 85%, then rose in a series of steep ascents and declines. After 25 years, it merely regained the level it first reached in 1929. On an inflation-adjusted basis, and ignoring positive returns from dividend payouts, the index didn’t best its 1929 level until 1995, a span of 66 years.
In 1968, the market went into a broad trading range which was to last 14 years. It dipped 26%, rose 68%, dove 48%, and then soared 71%–all within the first eight years of that period, making essentially no upward progress on a trend basis. It’s no wonder that a majority of individual investors gave up on stock market investing by the middle of the 1970s. Soaring inflation during the period meant that not only did the index make no net progress, it actually was cut in half in real terms.
The ’80s and ’90s changed all that and awakened a new generation of individual investors to the value of long-term investment in the stock market. True, there was excess volatility at times, most notably the 1987 rally (a jump of 39%), followed by the 1987 crash (a 33.5% decline). But the overall trend was strongly positive, and the old-fashioned notion of buy-and-hold came into vogue once again. Market timing, which had become a popular, not to mention profitable, strategy among technically minded investors during the ’70s, fell out of favor.
With the very strong uptrend of the ’80s and ’90s behind us, we recently performed a long-term regression study of the S&P 500. The results of that study tell us that even after the last two years of bear market decline, the index is still more than 50% above its median price trend as measured from the 1932 low to the present. That’s not to suggest the market will inevitably return to its median trend anytime soon, but it could mean that the downside risk has yet to be wrung completely out of the market.
It also suggests that the market is very likely to spend a considerable amount of time going sideways, with substantial intermediate-term dips and rallies creating an ideal situation for skillful market timers. Unfortunately for many investors, buy-and-hold may prove as frustrating during the current decade as it did between 1968 and 1982.
Fortunately, a wide variety of investment vehicles are now available that allow considerable freedom to take advantage of a choppy long-term market trend. They include exchange-traded funds (ETFs), leveraged bull and bear index and sector funds, and, coming soon, single stock futures. Use of these tools promises intermediate term opportunities in both bull and bear markets for the astute and skillful market timer.