Investment Strategy

Big market swings are tough, but staying invested is crucial

Sep 16, 2022

Market volatility can be nerve-racking, but it can also present new opportunities. Here are five time-tested ideas for helping investors weather the storm.

Olivia Schwern, Global Investment Strategist

Federico Cuevas, Global Investment Strategist

 

Our Top Market Takeaways for September 16, 2022

Market update

Can’t take the heat

It was another week dominated by inflation, and markets felt the heat.

The higher-than-anticipated U.S. August CPI print (headline +0.6% MoM versus consensus expectations of +0.3%) catalyzed the worst day of performance for the broad equity market since mid-2020 (when investors were first digesting news of the Delta variant). The S&P 500 fell more than 4% on Tuesday, with longer duration growth stocks tumbling more than 5%. Heading into Friday, stocks had erased last week’s gains.

The 2- and 5-year Treasury yields popped +34 bps (basis points) and +25 bps to 3.90% and 3.68%, respectively, their highest levels since 2008, while the 10-year Treasury yield rose back to its highest level of the year (3.46%). The 2-year 30-year Treasury yield curve saw the most severe inversion since the Tech Bubble, Federal Reserve rate hike expectations for next week’s meeting climbed to 80 bps (implying a ~20% probability of a 1.0% hike), and the U.S. dollar remained hovering at 20-year highs.

Against such a backdrop, we thought it would be helpful to consider some other volatile periods to see what lessons we can learn.

Spotlight

5 things to consider when markets are volatile

1. Big down days are tough, but staying invested is crucial. Since 1980, there have been 51 days during which the S&P 500 dropped more than 4% in a single session, as they did on Tuesday (only 0.5% of the time). Twenty-one of those days happened during the Global Financial Crisis in 2008/2009, and another nine happened during 2020. After each instance, the market never failed to recover and make new highs. 

This chart shows the log scale S&P 500 from 1980 to 2022, and shows the best days in the S&P 500 in green and the worst days (S&P 500 down by 4%+) in orange. It began in January 1980 at 106 and then moved up to 131 in January 1981 before moving down to 102 in August 1982, then shooting up to 159 in August 1983 and continuing to rise all the way to 248 in May 1986, and then again to 328 in October 1987. It continued to rise to 469 in March 1995, went to 653 in July 1996 before shooting to 1,458 in March 2000, then fell off to 848 in October 2002 and moved to 1,476 in December 2007. In March 2009, it moved to 700 and then spiked back to 1,159 in May 2010, then moved up to 1,941 in October 2014 and to 2,648 in February 2018. It went down to 2,447 in March 2020 and then bounced to 4,398 in January 2022, and now sits at 3,933 as of September 15, 2022. Worst days in the S&P 500 (green): 1. -20.47% Monday, October 19, 1987 2. -11.98% Monday, March 16, 2020 3. -9.51% Thursday, March 12, 2020 4. -9.03% Wednesday, October 15, 2008 5. -8.93% Monday, December 1, 2008 6. -8.79% Monday, September 29, 2008 7. -8.28% Monday, October 26, 1987 8. -7.62% Thursday, October 9, 2008 9. -7.60% Monday, March 9, 2020 10. -6.87% Monday, October 27, 1997 11. -6.80% Monday, August 31, 1998 12. -6.77% Friday, January 8, 1988 13. -6.71% Thursday, November 20, 2008 14. -6.66% Monday, August 8, 2011 15. -6.13% Friday, October 13, 1989 16. -6.12% Wednesday, November 19, 2008 17. -6.10% Wednesday, October 22, 2008 18. -5.89% Thursday, June 11, 2020 19. -5.83% Friday, April 14, 2000 20. -5.74% Tuesday, October 7, 2008 21. -5.28% Tuesday, January 20, 2009 22. -5.27% Wednesday, November 5, 2008 23. -5.19% Wednesday, November 12, 2008 24. -5.18% Wednesday, March 18, 2020 25. -5.16% Friday, October 16, 1987 26. -5.03% Thursday, November 6, 2008 27. -4.92% Monday, September 17, 2001 28. -4.91% Tuesday, February 10, 2009 29. -4.89% Wednesday, March 11, 2020 30. -4.81% Thursday, September 11, 1986 31. -4.78% Thursday, August 4, 2011 32. -4.71% Monday, September 15, 2008 33. -4.71% Wednesday, September 17, 2008 34. -4.66% Monday, March 2, 2009 35. -4.56% Tuesday, February 17, 2009 36. -4.46% Thursday, August 18, 2011 37. -4.42% Thursday, February 27, 2020 38. -4.42% Wednesday, August 10, 2011 39. -4.41% Wednesday, April 1, 2020 40. -4.35% Thursday, April 14, 1988 41. -4.34% Friday, March 20, 2020 42. -4.32% Tuesday, September 13, 2022 43. -4.32% Monday, March 12, 2001 44. -4.28% Monday, April 20, 2009 45. -4.25% Thursday, March 5, 2009 46. -4.18% Monday, November 30, 1987 47. -4.17% Friday, November 14, 2008 48. -4.15% Tuesday, September 3, 2002 49. -4.10% Monday, February 5, 2018 50. -4.04% Wednesday, May 18, 2022 51. -4.03% Thursday, October 2, 2008 Days where S&P 500 was down 4%+ (orange): 1. 11.6% Monday, October 13, 2008 2. 10.8% Tuesday, October 28, 2008 3. 9.4% Tuesday, March 24, 2020 4. 9.3% Friday, March 13, 2020 5. 9.1% Wednesday, October 21, 1987 6. 7.1% Monday, March 23, 2009 7. 7.0% Monday, April 6, 2020 8. 6.9% Thursday, November 13, 2008 9. 6.5% Monday, November 24, 2008 10. 6.4% Tuesday, March 10, 2009 11. 6.3% Friday, November 21, 2008 12. 6.2% Thursday, March 26, 2020 13. 6.0% Tuesday, March 17, 2020 14. 5.7% Wednesday, July 24, 2002 15. 5.4% Tuesday, September 30, 2008 16. 5.4% Monday, July 29, 2002 17. 5.3% Tuesday, October 20, 1987 18. 5.1% Tuesday, December 16, 2008 19. 5.1% Tuesday, October 28, 1997 20. 5.1% Tuesday, September 8, 1998 21. 5.0% Wednesday, January 3, 2001 22. 5.0% Wednesday, December 26, 2018 23. 4.9% Tuesday, March 10, 2020 24. 4.9% Thursday, October 29, 1987 25. 4.8% Monday, October 20, 2008 26. 4.8% Thursday, March 16, 2000 27. 4.8% Tuesday, August 17, 1982 28. 4.7% Tuesday, August 9, 2011 29. 4.7% Tuesday, October 15, 2002 30. 4.6% Thursday, August 11, 2011 31. 4.6% Monday, March 2, 2020 32. 4.4% Monday, May 10, 2010 33. 4.4% Thursday, April 5, 2001 34. 4.3% Wednesday, January 21, 2009 35. 4.3% Thursday, September 18, 2008 36. 4.3% Wednesday, November 30, 2011 37. 4.3% Thursday, October 16, 2008 38. 4.2% Tuesday, March 18, 2008 39. 4.2% Wednesday, March04, 2020 40. 4.2% Thursday, October 15, 1998 41. 4.1% Wednesday, October 6, 1982 42. 4.1% Tuesday, November 4, 2008 43. 4.1% Thursday, March 12, 2009 44. 4.0% Friday, September 19, 2008 45. 4.0% Tuesday, February 24, 2009 46. 4.0% Wednesday, August 14, 2002 47. 4.0% Tuesday, October 1, 2002 48. 4.0% Tuesday, December 2, 2008

If this week shook your confidence in staying invested, remember the potential cost of getting out of the market. In the past 20 years alone, the S&P 500 annualized 9.7%, but missing just 10 of the market’s best days, which tend to occur within less than one month of the 10 worst days, would have reduced that annualized return to 5.5%.

2. Don’t miss the forest for the trees. Short-term returns for portfolios aren’t great. Over the last year, a 60/40 portfolio of U.S. stocks and bonds has been down -12.4%. Over the last two years, that portfolio has been up 5.8% (2.9% annualized). However, over the last three, five and 10 years, the annualized returns have been 6.2%, 7.3% and 8.4%, respectively. The present era of high inflation and an aggressive central bank tightening cycle is taking a toll, but the long-term track record is strong—we expect diversified portfolios to continue that trend going forward.

3. Understand the power of a diversified portfolio invested over the long run. While markets have bad days, weeks and even years, history suggests that you are less likely to suffer losses over longer periods—especially in a diversified portfolio. While rolling 12-month stock returns have varied widely since 1950 (from +60% to -41%), a 50/50 blend of stocks and bonds has not suffered a negative annualized return over any five-year rolling period in the past 70 years. Historically, the longer you stay invested, the more certain you can be about the range of outcomes.

This chart shows the range of rolling annualized total returns of an investment in stocks, bonds and 50/50 from 1950 to 2021 • 1-year • Stocks: 60% to -41% • Bonds: 33% to -6% • 50/50: 42% to 20% • 5-year • Stocks: 30% to -6% • Bonds: 19% to 0% • 50/50: 22% to 0% • 10-year • Stocks: 21% to -4% • Bonds: 14% to 1% • 50/50: 16% to 0% • 30-year • Stocks: 18% to 5% • Bonds: 11% to 2% • 50/50: 14% to 5%

4. Time flies when you’re climbing back to highs. Goals-based, multi-asset portfolios are meant to achieve financial goals through bull markets, bear markets, high-volatility environments, low-volatility environments, inflationary environments, deflationary environments, expansions, recessions, wars, pandemics and anything else short of the heat death of the universe.

With investor sentiment near all-time lows, the S&P 500’s previous all-time high (~4,800 in early January) seems like a distant memory. But this too shall pass. From current levels, the market needs a ~25% return to get back to previous highs. Even if it takes three or four years, the average annual return needed, 9% or 7%, respectively, would be right around historical norms.

This chart shows the average annual total return for the S&P 500 to get back to January 3, 2022, market highs. • The average annualized return (including dividends) required to get back to peak in one year is 25%, in two years is 13%, in three years is 9%, in four years is 7%, and in five years is 6%. • On the other hand, the cumulative total return required to get back to peak for one year is 25%, for two years is 27%, for three years is 30%, for four years is 33%, and for five years is 35%.

5. Find value in murky waters. Through all of the daily volatility in markets and uncertainty in economic data, our objective is to build portfolios that allow investors to reach their goals with appropriate risk. It’s worth highlighting two opportunities that are offering compelling entry points.

For one, core fixed income is our highest-conviction idea that looks set to provide a buffer against potentially adverse economic outcomes. In the event that a U.S. recession does materialize and the 10-year Treasury yield ticks down from ~3.50% to 2.50%, we’d expect U.S. investment-grade bonds to return ~11%. If instead the 10-year Treasury rises to ~4%, U.S. investment-grade bonds would be flat.

This chart shows the potential total return over 12 months for U.S. Aggregate Bonds and U.S. Municipal Bonds in five different scenarios. • What if 10Y rises to 4%? U.S. Agg 0%, U.S. Munis -1% • 3% 10Y: U.S. Agg and U.S. Munis 7% • 2.5% 10Y: U.S. Agg 11%, U.S. Munis 8% • 2% 10Y: U.S. Agg 14%, U.S. Munis 9% • Recession: 0.75% 10Y, U.S. Agg 19%, U.S. Munis 12%

In equities, we are making sure we have a proper balance between sector, style and size, with a tilt toward defensive and quality companies. Meanwhile, mid-cap equities are presenting an interesting opportunity. Current valuations are well below their long-term averages, compensating investors for a ~25% decline in forward earnings expectations—during the Great Financial Crisis, forward earnings estimates declined by 35%. Most of their revenue is derived from the United States, a value-add in a world of European energy and Chinese property sector crises. And finally, history shows a track record of faster earnings growth rates and exposure to stronger capital expenditures from large-cap companies.

In turbulent times, it is key to remember your core investing principles and consider capitalizing on windows of opportunity that the market presents. Please reach out to your J.P. Morgan advisor to hear more about how any of these dynamics may impact your plan.

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Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

All market and economic data as of September 2022 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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JPMorgan Chase Bank, N.A. and its affiliates (collectively "JPMCB") offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ("JPMS"), a member of FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states. Please read the Legal Disclaimer in conjunction with these pages.

INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED

Equal Housing Lender Icon Bank deposit products, such as checking, savings and bank lending and related services are offered by JPMorgan Chase Bank, N.A. Member FDIC. Not a commitment to lend. All extensions of credit are subject to credit approval.