Why A Falling Stock Market Shouldn’t Spook Your Investment Plans

Why a falling stock market shouldn't spook your investment plans

2022 hasn’t been a great year financially for many. Stock market performance across the global has been very ordinary and high levels of inflation have hit the wallet or purse of nearly everyone. You’d be excused for thinking that we are on the road to an oncoming financial apocalypse!

Food and petrol prices are high, interest rates are going up, there’s not a lot of short term reprieve for consumers or investors. Combine this with the geopolitical issues in Ukraine and you’d be excused for thinking that investment doom and gloom is here to stay a while! Below we go through why a falling stock market shouldn’t spook your investment plans.

Inflation is really the main game in town at the moment.  There are many reasons for it, however it is driving higher interest rates, lower share market performance, lower property prices (or at least taking the froth off the top) and also driving a lot of uncertainty around the world. As we know from history, in terms of inflation that there is no antidote for higher prices, other than further higher prices. Inflation will eventually subside and we will eventually get back to some form of economic normalcy, similar to what had happened with COVID though this will take some time.

Just over 2 years ago no one really knew what was happening when this mystery illness emanating from China came onto the scene and there was fear about what the future was going to look like. The share markets at the time also reacted to this uncertainty and once the pandemic took over the world, markets capitulated!

Then we took a step back, recalibrated and got on with things (albeit in a new normal style) and life went on. Markets responded and in 2020 we had a record bounce back from a record quick market drop. Vaccines were created, we found ways to do business via new ways (i.e. work-from-home and a hybrid of part WFH and part office) and basically we accepted this new normal and moved on with our lives. 

Let’s look at calendar Year to Date performance of worldwide indices (as at close of markets Tuesday 14th June):

Dow Jones Index down 16.59% 

Nasdaq 100 down 31.59% 

S&P 500 down 21.83% 

FTSE 100 down 3.99% 

DAX 30 down 16.19% 

Nikkei 225 down 9. 12% 

Shanghai Composite down 11.80% 

ASX 200 down 11.91%

As you can see from the list above there is not one worldwide index that has had a positive performance for 2022 which isn’t great reading for most investors.

Recent stock market history after reaching historical highs

Now let’s delve into some stock market history (for ease of obtaining information we will use the S&P 500 chart) and look at significant S&P 500 highs and lows over the last 40 or so years starting with the year 1981 (using the Yahoo Finance S&P 500 chart)

  • The previous big inflation crisis in 1981 was the precursor to a fall in the S&P 500 from a record high on 20th November 1980 (140.40) the S&P 500 dropped to 103.85 on 16th August 1982 (a drop of over 26%). By December 1982 it had reached the previous high, eventually rising to 170.53 at 21st June 1983.  
  • I’m sure most of you are familiar with the market craziness of 1987. The S&P 500 (and most world wide stock indexes) peaked in August 1987 then came October, particularly Black Monday (Black Tuesday in Australia, New Zealand and Asia) on October 19th 1987 (20th in Australia, New Zealand and Asia). After several preceding days of large losses on Black Monday  the S&P 500 lost 20.4% in for the day, while the Dow lost 22.6%! Between the 14th and 19th October 1987 the Dow lost over 31%! What is lost from commentary about this period is that most indexes were only slightly negative for 1987, while the Dow actually finished positive for 1987! From the peak in August 1987 through to the devastating losses in October 1987 the S&P 500 had surpassed the August 1987 high by September 1989.
  • In March 2000 after a large bull market run from late 1994 to March 2000, the S&P 500 reached an intraday high of 1,552.87 on 24th March 2000. After the dot com bubble popped the S&P 500 fell to a low of 794.10 on 30th September 2002 before reaching the previous S&P 500 high in May 2007.
  • After the Global Financial Crisis of 2007/2008 hit, the S&P dropped from its closing high of 1,565.15 on 9th October 2007 to an intraday low of 666.79 on 6th March 2009. It took the S&P 500 just over 4 years to reach the previous high 1,552.87, breaking this level on March 28th 2013.
  • February-June 2020 was one of the craziest stock market performances in recent times. Stock market drops of over 5% a day weren’t uncommon across the world.  After hitting a record closing S&P 500 high of 3,386.15 on February 19th  2020, the market plummeted due to the increasing concerns of the COVID 19 pandemic (the S&P 500’s fastest ever drop from its peak) to 2,237.40 on March 23rd 2020 (losing 34% from 19th February 2020 to March 23rd  2020). As most of you are aware the markets then went on a bull run, reaching a new S&P 500 record high on 18th August 2020, while continuing to climb for 2020.

The point we are trying to make is that no matter what stock market or economic turmoil might be going on, the stock markets have always reached its previous high. The only thing we can’t predict is how long it will take to get there.

Now we have another period of economic and stock market uncertainty and there are a few jitters amongst investors worldwide. As we touch on a bit later inflation is the key to most of this uncertainty and until this starts to come down we will have an extended period of uncertainty. We know it’s not ideal when you look at your recent performance and see a loss, however this is only on paper and there is no need to sell at this time. The flip side to this uncertainty is it provides investors with great buying opportunities so sit tight and wait.

Investing should always be for the long term and this falling stock market shouldn’t spook your investment plans.