3 Reasons Long-Term Investors Should Be Optimistic

It seems like bad news is inescapable these days. For much of last year, even good news about the economy was bad news for markets. Yes, 2022 was a terrible year for financial markets. In fact, it was the worst year ever for bonds (by a landslide) and the seventh worst for U.S. stocks (S&P 500) on record. Although we’re still not out of the woods with inflation or the Federal Reserve’s historic rate-rising campaign, long-term investors have several reasons to be optimistic about the market outlook.

3 reasons for investors to be optimistic about the long-term market outlook

Short-term market moves should always be expected, especially for equity investors. But over the long-term, historical data paints a much better picture about the resiliency of markets.

1. Over time, markets have always gone up more than down

U.S. stocks may have an average return of 10% per year, but the S&P 500 has only ended a year with a 10% return once. The distribution of calendar year returns skews very positive, with over 37% of years ending with a return north of 20%. Another optimistic fact for long-term investors: on average, stocks and bonds end the year with positive returns roughly 75% and 89% of the time, respectively. That said, investors should always be prepared for volatile years, which bring down the average.

2. Markets can turn around quickly

Day to day

Staying invested (not going to cash) is usually key for investors. Markets can turn on a dime, even during the most extreme bouts of volatility. In fact, 70% of the best days for the S&P 500 fell within just two weeks of the worst days. As the chart below illustrates, missing the best days can really be costly.

Year to year

Stocks and bonds have, historically, rebounded the year after a down year. But what about after a top 10 worst year, such as 2022?

Well:

Average returns for both equities and fixed income have been positive the year after posting extreme losses. Bonds were only negative 33% of the time the following year while stocks were more of a coin-flip at 45%. What’s the market outlook in 2023? That remains to be seen, but there are other reasons long-term investors can be optimistic.

3. It’s rare for stocks and bonds to be down at the same time

It’s only the third time ever stocks and bonds were both negative to end the year. Diversification is the most powerful tool investors have to reduce investment risk, but nothing works every time. Given how rare it is for stocks and bonds to be positively correlated, there’s reason for a more optimistic market outlook, especially given performance was largely positive the following year.

More statistics about consecutive down years for stocks or bonds (independent of each other)

According to data from BlackRock:

• Bonds have never lost money three years in a row. U.S. bonds were negative in 2021 and 2022, marking the third time fixed income had back-to-back losses since 1926.
• Year-over-year losses are more common for stocks, as you might expect. Since 1926, stocks were down four consecutive years only once (between 1929 and 1932), three years in a row twice (latest being 2000 to 2002), and one instance of back-to-back losses (between 1974 and 1975).
• Stocks have lost money only 26 out of 97 years (1926 to 2022). The average loss in a down year was -13.2% and interestingly, the average return in the next 12 months was 13.2%. However, volatility should be expected: 20 out of 25 subsequent 12-month periods experienced double-digit gains or losses.

Markets are resilient, but not every company is

There’s always going to be a crisis. Geopolitical events, new highs, new lows, recessions, bear markets, interest rate hikes just to name a few (you can see how these played out here). But regardless of the point of entry, over time, a diversified portfolio has produced positive returns. Investing is about time in the market, not timing the market.

For simplicity, this article focused on prominent U.S. stock and bond indices, which isn’t necessarily representative of a truly diversified portfolio which may include international investments and different weightings of asset classes for example. And it’s critical to remember that concentrations in one sector or industry means your portfolio may not follow the same historical market trends. So be sure to review your actual investments. Not all stocks will recover. Or even take the whole tech-heavy Nasdaq Composite index: after peaking in March 2000, it took over 15 years to get back to previous highs. So a lot is riding on how your portfolio is positioned and how you respond over time as the market moves.