This Stock Market Decline Has a Silver Lining

The stock market is easily in its worst shape since the COVID-19 crash…

Stocks are in freefall. The S&P 500 Index is now 18% off its highs and is quickly approaching a bear market. And it ticked another negative box to start May.

The market hit its first new 52-week low since March 2020. That’s a sure sign that the trend is down. But there’s some good news amid the losses.

History shows us that this won’t necessarily lead to a further drop. And it will almost certainly allow for major outperformance in the years ahead.

Let me explain…

Nobody likes to lose money in the markets. It hurts to watch your balance decline. And it’s not just because of the losses… It’s also because of the unknown – being unsure of when things will turn back around.

Sentiment is negative, given what has happened this year. But if you’re inclined to give up on the stock market entirely, that might not be the best move… especially if you don’t need your investment dollars for a few years.

You see, history shows us that declining prices aren’t always bad. Instead, when stocks hit a new 52-week low, it often sets us up for future gains.

That’s what we’re seeing now. The S&P 500 hit its first 52-week low in years at the beginning of May. Take a look…

Again, the trend is down. We’re darn close to an official bear market. And no one knows for sure when the bleeding will stop.

That’s scary… But you shouldn’t give up. New 52-week lows are rare – they’ve happened less than 1% of the time since 1950. But they shouldn’t send you running for the hills.

Instead, stocks tend to perform about average in the short term following similar setups. And if you have a longer time horizon, outperformance is near certain. Take a look…

Surprisingly, we’ve only seen 23 new 52-week lows over this 72-year period. Even more surprising, stocks don’t tend to keep crashing after they occur.

In fact, they typically outperform over the next six months – and only slightly underperform in the next year.

Things get much better in the long term, too. The typical two-year return for U.S. stocks is 16.4%. But that number balloons to 24% after these types of extremes. And the three-year return grows from 25.6% to 31.2%.

This is what we should expect from here… Falling prices are setting us up for future gains. While it doesn’t make today’s pain any easier, it’s a wise perspective to keep in mind during difficult times.

Most investors have missed this setup. They’re selling when they should be sitting tight. But you don’t have to make the same mistake yourself.

Of course, you should wait for the trend to move in our favor before diving back into any speculative trades. But if you have long-term stock holdings, now is not the time to sell.

Good investing,

Brett Eversole

This article was originally published on this site