Nine years after the market reached its low point amid the financial crisis, key indicators signal continued strength in US stocks. The broad US equity market, in spite of recent volatility in 2018, continue to show strong corporate earnings growth. According to FactSet, 77% of companies in the S&P 500 Index have posted 2017 results tracking upside revenue relative to analyst estimates and 73% of reporting companies announced a positive earnings surprise for the 4th quarter in 2017. By any metric, overall earnings growth are robust and have moved the Dow Jones Industrial Average to all-time highs in the 26,500 range in late January. Keep in mind that a 1000 point move in the Dow is less than a 4% move at these levels.
Investors should focus on these three critical facts about the current market and how US equity markets have responded to prior episodes of volatility.
The US equity markets are driven by fundamentals and strong earnings
According to FactSet, company earnings in the S&P 500 Index are expected to grow 16.8% in 2018, with increases forecasted across all sectors in the market. The estimates continue to be revised upward, as the effects from tax reform and positive economic momentum around the globe filter down to companies’ bottom lines.
Market corrections are normal and they don’t always translate into full-year declines
Major pullbacks during the current cycle include; 2010 -16.0%, 2011 -19.4%, 2012 -9.9%, 2013 -5.8%, 2014 -7.4%, 2015 -12.4%, and 2016 -13.3%. 2017 was an abnormal year with markets moving higher with steady gains in every month. The average annual return for the S&P 500 Index was 10.1% including these pullbacks dating back to 2010.
Staying invested has resulted in a greater chance of positive returns while market timing is a risky game
It is impossible to predict when the markets volatility will start and stop. Investors who don’t stay in the market often lose out on later gains. Equities historically have proven resilient after big declines. The S&P 500 average forward performance after a daily decline of -3% to -6% averages a 3% gain for a three month period, 5% gain for a 6 month period and 10% gain for a twelve month period.
What is the key take a way? A consistent long-term perspective can help investors stay on track through this current bout of market volatility. We have seen the fear, panic and capitulation phases of the cycle in previous years. The events around them are always different. The fear and panic are temporary, however it is tough for investors to watch account values decline in the short-term.