Global equity and bond markets have experienced heightened volatility over the last several months as elevated inflation readings and the prospect of higher interest rates has made the investment landscape appear treacherous.
This increased volatility can certainly be unnerving for investors but it is not necessarily unexpected, especially for a mid-term election year. Since 1980, the S&P 500 has an average intra-year decline of 14%.1 But the equity market drawdowns tend to be more severe in midterm election years, particularly in the months prior to Election Day. Research from Federated Hermes Investors found that “Leading up to Election Day, stocks tend to experience a pronounced pullback – 19% on average – before rallying afterward”2 in midterm years.
Historically investors have typically been rewarded for staying the course through the temporary pain of volatility during midterm years. Federated Hermes Investors found that “the S&P on average has risen 32% off the midterm election-year bottom. And it has not declined in the 12 months following a midterm election since 1946.”3
Avoiding the Temptation of Market Timing
While it may be tempting for investors to try and time the market by selling investments following a market decline and re-enter the market when things feel safer, investors should note that timing the market with such precision is extraordinarily difficult. JPMorgan highlights the pitfalls of a market timing strategy:
- “First, there is no guaranteed ‘signal’ to get out of the market, and market bottoms are only determined in hindsight.
- Second, the investor would need to buy in on the worst days during some of the most significant market drawdowns when loss aversion is at its greatest.
As a result, it is hard to believe that someone could be smart enough to consistently miss the worst days while courageous enough to invest for the best days.”4
Moreover, some of the days of best performance occur within weeks or even days of the worst days of performance and those good days are extremely important to recovering losses experienced on the worst days. The chart below from JPMorgan shows the cost of missing out on the best days of performance.[+] Read More