Market insights

If you want to position yourself to succeed as an investor, then you need perspective. Need proof? Just look at the market’s recent performance.

After hitting record highs this year, the S&P 500 tumbled 8.5%* from mid-July to the first week in August, partly due to concerns of an economic downturn.

However, subsequent economic data allayed those fears, and the index recovered as quickly and as sharply as it declined. The S&P 500 ended the month up 2.4%. Surprised? Not if you’re an investor with perspective.

The fact is that the S&P 500 has a track record of declining sharply from its highs and snapping back quickly.  Below are just a few examples over the last 10 years, by the months the decline started.

• January 2014 (dropped 5.8% in 13 days, back to highs in 18 days)
• September 2014 (dropped 7.4% in 20 days, back to highs in 13 days)
• April 2019 (dropped 6.8% in 24 days, back to highs in 14 days)
• September 2021 (dropped 5.2% in 22 days, back to highs in 14 days)
• March 2024 (dropped 5.5% in 16 days, back to highs in 19 days)
• July 2024 (dropped 8.5% in 14 days, back to within 0.3% of highs the following 20 days)

This isn’t to say that recoveries are always that quick. Over the same 10 years, we’ve seen multiple periods where the index fell and then took several months or even more than a year to fully recover.

Nonetheless, the S&P 500 is up over 250% since the beginning of 2014, overcoming those larger downturns along the way.

Your key takeaways

You can’t know when markets will recover, and although past performance is no guarantee of future results, history reminds us that over time, markets have risen. So, stay invested during downdrafts. But there are some other takeaways from August’s market that can give you a powerful investment perspective, namely the importance of diversification and of taking economic predictions with a big grain of salt.

• Diversification – Bond prices held up in August when the S&P 500 was declining. Edelman Financial Engines offers highly diversified portfolios, so clients can benefit from opportunities across asset classes, which include exposures to bonds and international stocks.

• Economic predictions – Forecasters were quick to mention the possibility of a recession following the jobs report in August. Having read years of economic and market predictions, I’m very skeptical of them. In the last three years, we’ve had predictions of hyperinflation, stagflation and recession (with forecaster consensus on the last one in 2023). These have all been wrong.

This isn’t to say a recession is out of the question. But theory and evidence show that calling these correctly is more luck than skill. And one economic report in one month shouldn’t be the basis of predicting an economic trend or market trend. We’ve seen numbers seesaw month to month.

However, the market remains in a tense guessing game between fear of an economic downturn and optimism for interest rate cuts by the Federal Reserve. A future economic report outside of expectations could result in another spasm of market volatility.  Surprises are by definition unexpected, so you’d need to be consistently lucky to predict these successfully.

Volatility can be unsettling. Print out what we have discussed if necessary, so you can reference it and gain the perspective you need to soldier through. And, as always, call your financial planner if you have any questions or concerns about your portfolio.

* Index return data provided reflects “total return,” which includes income generated by securities held within the index, such as dividends and interest. Because it includes income, index total returns can differ from index price returns that only consider prices.