Decades-high inflation. Russia’s war in Ukraine. Tensions with China. The stream of negativity in today’s news cycle might make investing seem daunting. Indeed, such times have historically led many to either sell or otherwise avoid stocks, but in Fisher Investments’ reviews of market history, such headline risks are virtually omnipresent. In our view, those who can see past gloomy headlines and remain focused on the future usually benefit from stocks’ upside surprises hiding in dark times.

In our experience, many see today’s problems as insurmountable—or persistent enough to hamstring stocks long term. Possibly, but first consider the alternative: Stocks actually rise long before such fears vanish. Prior to 2022, Fisher Investments’ reviews of market history show there had been 14 bear markets since reliable S&P 500 data became available in 1926, each lasting about 21 months on average.[i] The recoveries were usually sharp, as stocks bounced an average of 49% in the 12 months following bear market troughs.[ii] On average, it took 42 months for stocks to recoup bear market declines, but this is skewed higher by the 1929 – 1933 bear market, which took 268 months to recover pre-bear market levels (not including dividends). The median—the midpoint of all observations—is 17 months, with recoveries ranging from as short as 3 months to as long as 69.[iii] According to Fisher Investments’ reviews of market history, these climbs came despite the fact economic conditions and worries generally persisted well after the climb started. However, many still believe “this time is different,” dismissing markets’ ability to bounce back. We suspect this is because people typically focus on today’s problems more than those of the past.

Consider the recent past. In 2020, uncertainty and fear amid COVID lockdowns sent US stocks tumbling to their March 23 low.[iv] US markets rebounded quickly, rising 69.5% through yearend.[v] 2007’s global financial crisis led US stocks into a long, steep bear market—falling -55.7%.[vi] While it took about five and a half years to recoup these declines, the following bull market was history’s longest. But things rarely look or feel good at the bottom, because stocks are forward-looking—pricing eventual improvement before it arrives. During 2020’s recovery, new COVID variants and ongoing US political drama garnered much media attention. Yet, stock markets foresaw limited impacts and priced in expected growth from the nascent reopening.

Exhibit 1 shows how legendary investor Sir John Templeton imagined sentiment’s evolution during a bear market cycle.

Exhibit 1: Templeton’s Market Sentiment Life Cycle

Disclaimer: The illustration above is intended to demonstrate a theoretical point and does not reflect actual returns or market behavior.

Templeton famously stated, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Fisher Investments’ reviews of market history show this often holds true.

This is because low investor sentiment can set up positive surprises for stocks. Fisher Investments’ reviews of market history suggest companies don’t need incredible results for their stock to rise—they just need to outperform expectations. This works both ways though, as even low expectations are sometimes still too optimistic. However, when negative news dampens investors’ views of the market, subsequent positive results can boost stocks higher. A new bull market began in March 2009 and ran through its latter half, despite events like unrest in the Middle East, the H1N1 virus, Dubai debt concerns and high US unemployment dominating headlines. Or consider 2020’s recovery again—stocks rose amid news of new variants, rolling lockdowns globally and extraordinary political tension. Forward-looking stocks advanced anyway, climbing the proverbial “wall of worry.”

We have also found some investors seem willing to miss the recovery’s first 15% – 20% rise, if it means avoiding more potential downside at a bear market’s end. This is dangerous, in our view. First, initial bull market surges usually come when sentiment is still bleak. It generally won’t be clear a bull market is underway until long after the fact, so avoiding stocks for clarity’s sake can be exceedingly costly. Second, consider a main reason stocks are so important to portfolios: compound growth—the growth not only of the principal you invest, but the future growth of earlier gains. The first 15% - 20% is vital because it compounds for the duration of the bull market, meaning it could be much larger than just 15% of your starting principal by the bull’s end. Consider this simple, hypothetical illustration from the 2009 – 2020 bull market: $100,000 invested in the S&P 500 on March 9, 2009—the 2008 financial crisis’s low—and held through the new bull market’s peak on February 19, 2020 rose to $628,881.[vii] However, if you waited until a 15% upturn “confirmed” it was time to buy in—a mark reached just days later on March 17, 2009—it rose to $546,419.[viii] That $82,462 difference illustrates the compounded cost of waiting—huge, considering the starting principal was $100,000. Further, that doesn’t even take into account growth beyond that bull market.

Successful long-term investing requires patience and discipline, in Fisher Investments’ view. It isn’t easy to stay positive when the world seemingly turns upside down—but those who do can benefit greatly.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated herein. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.

[i] Source: FactSet, as of 8/9/2022. S&P 500 bear markets, 1/3/1928 – 12/31/2021.
[ii] Ibid. Statement based on average S&P 500 12-month forward price returns from bear market bottoms.
[iii] Ibid.
[iv] Ibid.
[v] Ibid. S&P 500 total return, 3/23/2020 – 12/31/2020.
[vi] Ibid. S&P 500 total return, 10/9/2007 – 3/9/2009.
[vii] Ibid. Hypothetical growth of $100,000 invested in the S&P 500, based on total returns from 3/9/2009 – 2/19/2020. Note: You cannot invest in an index itself.
[viii] Ibid. Hypothetical growth of $100,000 invested in the S&P 500, based on total returns from 3/17/2009 – 2/19/2020. Note: You cannot invest in an index itself.

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