Does the market always goes up?

Typically when people talk about 'the market' they refer to the S&P500.

Does the market always goes up/always recovers?

The saying/quote of “The market always goes up” or the alternative ” The market always recovers” are ones which grinds my gears, these quotes are technically true but out of context and without context these quotes can be dangerous. The term ‘market’ is used loosely and can mean anything, relying upon the interpretation of the term. Typically these quotes refer to the S&P 500, one of the most common ‘markets’ which is referred to on social media where these quotes are mostly tossed around as a feel good method to make negative market movement seem normal.

In fact negative market movement is completely normal and seeing these quotes plastered everywhere after a small market move, such as -5%, is worrying.
These sayings can be misleading but also remember, you have many tools and strategies, which i talk about at the end, which are at your disposal to reduce the affects and risks of such market events which will be talked about.

The market fluctuates.

We have to remember that the market fluctuates and price movement is very normal. Lets quickly look over the last 30 years (120 quarters) to see if at any time during a quarter a price index dropped either 10% or 20%. 10% is considered a correction and 20% bellow is considered a bear market when bellow the 4 quarter trailing high.
Here are some results from a seeking alpha article:

  • 57% of quarters have a price at least 10% below the 4 quarter trailing high (average 2.27 times per year).
  • 18% of quarters have a price at least 20% below the 4 quarter trailing high (average 0.73 times per year).
Number of quarters bellow 4 quarter trailing*Reference link: https://seekingalpha.com/article/12…0-percent-and-20-percent-negative-price-moves

 

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Why are these statements/quotes so dangerous?

Now that’s out the way I want to move onto why such quotes are dangerous. As we know the market fluctuates, it goes from overvalued to undervalued, fear and greed. When the market is greedy this can turn the market into a bull market and so potentially overvalued, the opposite being is fear which turns the market into a bear market and possibly into the undervalued territory.

Let’s look at what most presume is talked about when using the quote “the market always recovers”.
Taking a look at the pervious 5 year chart of the S&P500 we’ve noticed a great up trend and has returned 106.38% over the time frame, as of writing the market has returned 23.55% in the last year alone.

The S&P500 5 year chart​We notice a pull back in March 2020 which was a 31.8% drop – 3380,16 down to 2304.92. But after, as the quote goes, it has recovered by impressive margins with no doubt one of the most impressive bull markets seen.

But I intend to zoom out to display why this quote can be dangerous. Taking a look at the max chart we will discover long period of time where the market didn’t reach its ATH (All Time Highs) once more.

During the year 2000 the S&P500 reached a height of around 1500. Between 1995 and the peak in March 2000 the Nasdaq rose 400%. This has came to be known as the Dot-com bubble.

At this time the market hit new dizzying heights for investors. Only to then have the bubble pop and the market, as a whole, fall to its lows in the year 2002. The Nasdaq fell from its heights by 78% by October 2002, relinquishing all gains previously made during the bubble.
Then the market started its long journey back to recovery. It taken 7 years for the S&P500 to get back to its once dizzying heights (2000-2007), only to then fall once more to its lows in 2009. After taking the last 7 years to recover the market then got hit with what’s known as the Great Recession, from its new high in October 2007 it then fell 49.17%.
Once again the market had to rebuild itself, retracing its past steps and in 2013 the market managed to not only recover to its ATH but then go on to one of the longest bull markets in history.

Does the market recover?

Yes, it can, but there is also an argument to that are you in a position of possibly waiting 13 years to once again break ATH?​
To take note from this it took 13 years, from 2000 to 2013 for the S&P500 to fully recover and create new ATH. This is a reminder that investing is for the long term and there can be long periods of time of stagnation of an overall index.
*To note this does not reflect an investment strategy such as cost averaging but reflects to the statement/quote that the market always recovers. If you were retiring, retired or starting later in life at investing, no matter what stage 13 years is a long time.
Screenshot 2022-01-11 173622.png

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Exception to the rule. 

The Nikkei Index.

Another exception to the rule is the Nikkei index of the Japanese stock market.
In December 1989 the Nikkei index hit its ATH of 38,957.44 and closed at 38,915.87, having grown six fold over the pervious decade.
Why is the Japanese Nikkei index relevant? Because it has NEVER recovered. That is right, in the last 33 years the market has never recovered and at the time of writing the market closed at 28,222.48. The market is down 27.4% from its heights in 1989. Around 2009 the Nikkei index hit its lowest, as we know this date relates to the Great Recession.
What happens if you bought at bottom? Well the market in 2009 was around 8000, to todays market close as stated above, this would amount to a gain of 252.7%.​
Screenshot 2022-01-11 174451.png
Lets take a look at another market, one which is closer to the audience of this forum, the FTSE100.
The UK isn’t a market as loved as the U.S. S&P500, the FTSE compared does not have the growth or bull market as recently seen in the U.S.
Taking notes of previous dates used as reference points we will look at the year 2000, 2007-2009 and beyond. In the year 2000 the FTSE100 hit its (at the time) ATH of around 6,900 to then crash to the low in 2003 of 3,600, a drop of 47%. Then recovering (but not hitting new highs) to the heights in 2007 of 6,600. It then took till 2016 to create new heights for the index of over 7000. Todays price of the FTSE 100 is 7,491.37.​
Screenshot 2022-01-11 175355.png
As you can now tell from historical data, though this cannot be used to predict the future, that such quotes can be dangerous and misleading. With such information at hand or at least laid bare before you, that you will not be falsely mislead into a false sense of security that no matter what the ‘market’ will go up and will recover. Long periods of stagnation and poor performance can weigh on an investor, especially those expecting phenomenal returns as we have experienced lately from the overall market. The key to combating not just the possible stagnant returns of a market but also the possible emotional risk.
While I’ve just shown examples of how a market may take a while to recover, maybe a decade or never, that it doesn’t have to reflect your portfolio.

Tools investors can use.

Luckily for us investors we have other asset, tools and strategies we can deploy to reduce such weighting of a prolonged bear or stagnant market. One of the easiest methods is cost averages, otherly known as Dollar Cost Averaging (DCA) in America. With this technique you can incrementally buy when the index is trending downwards, reducing your average. Alternatively you can invest when trending upwards, increasing your average price but also take advantage of a rising market.

Alternatively you may decide to diversify/hedge your portfolio, this can come in many forms. One form of diversifying is to expand your geographic exposure. This can be done by investing into multiple indexes or simply buying an ETF such as a All-World or All Cap which does the geographic diversification for you. Alternative investments such as gold or bonds can be added as a hedge within an overall portfolio to reduce reliance and allocation on a specific asset class. A combination of any or none of these can be used within a portfolio, as long as you, the investor, understand the risks, your risk profile and your investment strategy. Do not fall for the false sense of security by telling yourself “the market always goes up”, understand it can dip, correct and even crash. Such is life of the market but you also have tools at your disposal to reduce such risks.​

Does the market always go up?

Using the term “the market always goes up” can be extremely dangerous, especially for new investors. Giving them a false sense of safety. Investors should focus in what stage the market or Index (which is traditionally quoted for this saying) is in at the time of investing. As we have seen there has been periods of time where the market has taken 13 years to reach its ATH once more.

This saying is just to vague and can lead investors into a false sense of security. I would question anyone’s motives if they are making the statement that the market always goes up.

If the Cost Averaging strategy seems interesting to you, check out our article called Buying The Dip.

Buy The Dip

 

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