🤯 Five mind-blowing market facts

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I’ve studied the stock market pretty intensely for almost 12 years now.

Over a decade of pulling lines of data, building spreadsheets, adding spreadsheets on top of those spreadsheets, and marveling at the parallels that exist between economic cycles and human reactions.

Correlation doesn’t always equal causation, but sometimes it does.

Those are the moments I live for — the golden tidbits that ultimately make you (and me) better investors.

This week, I want to share the five craziest facts I’ve pulled about the stock market. Stats that are great party pleasers for even your most uninterested friends. But even more, stats that have taught me the most about investing.

One-third of S&P 500 selloffs have lasted less than a month.

The mood can change quickly when markets start to slide.

Podcasters’ voices sound a little more frantic. Business news channels run special programming on markets in turmoil. Your grandma starts asking you what’s wrong with the Dow.

Fast-forward a month, and that world-altering event you were chewing your fingernails over is a distant memory.

This happens a lot. More often than you think.

Since 1950, there have been 92 drops in the S&P 500 of 5% or more (from 52-week high to low). One-third of those selloffs lasted less than a month, and 86% of these selloffs ended before entering a dreaded bear market (20% below the highs).

That’s right. Most of these moments are blips on the radar, yet your lizard brain keeps panicking.

What this means for you: Pay attention to your portfolio’s numbers, not the bright flashes on your brokerage account. Invest confidently until we hit a recession, which is often the cause of bear markets/big crashes.  And even then, invest confidently once your financial house is in order.

Since 1950, the S&P 500 has closed within 2% of a record high more often than it’s closed 20% or more from a record high.

Ask a group of strangers on the street to draw you a chart of how the U.S. stock market has performed over the past several decades, and I bet at least a handful of them would draw a straight line down.

I’m not exaggerating. Americans who take part in the Conference Board’s monthly consumer survey – one of the most highly regarded studies on how Americans feel about the economy –  are shockingly negative.

Since the survey started in 1987, there have been just six months in which over half of respondents thought stocks would rise over the following year. On average, 64% of people–or six out of 10 strangers on the street–thought stocks would drop or stay at current levels.

All of this hate, even though the S&P 500 has climbed in 80% of all 12-month periods since 1990, and closed at or near a record high in one out of every four days.

Why don’t people trust the stock market? It’s probably a mix of financial illiteracy, rampant pessimism, and old battle wounds from penny stock moonshots.

No matter the excuse, they’ve been woefully misguided. In almost 100 years of wars, humanitarian crises, economic struggles, market leaders, market losers, thriving and dying industries, and numerous inventions, U.S. stocks have collectively increased with financial well-being and corporate profits.

However, all of these factors are rarely in sync on a day-to-day basis.

That’s why investing is so hard.

What this means for you: You can’t afford to be pessimistic on U.S. stocks. Decades of data say so. If you’re aiming for a goal decades down the road, it’s worth focusing your mental energy on how to stay invested.

The stock market has turned before the economy in seven out of the past 11 recessions.

This stat is for all your friends who think the stock market is the economy. Or at the very least, that stock prices move in lockstep with their feelings of financial security.

In the 11 recessions since 1950, the S&P 500 has peaked an average of six months before the economy entered a recession. And over that same period, the S&P has bottomed an average of three months before a recession has ended. In fact, the stock market peaked before a recession started and bounced before a recession ended in seven out of those 11 recessions.

Because on Wall Street, expectations matter more than reality. Often, when you’re screaming in pain for the market gods to bestow even a little bit of mercy on you, stock prices are primed to move higher because the bar simply can’t move much lower.

Just take a look back at headlines from March 2009, when the S&P 500 bottomed after the financial crisis. The unemployment rate was nearly 10%, the stock market had already been cut in half, and then-Fed chair Ben Bernanke warned that “more would need to be done” to stabilize the financial system. Those were dark days, yet they were the beginning of an 11-year rally in stock prices (and a generational buying opportunity).

What this means: You can’t invest in what is, because the market trades on what could be. Trust the process, not your gut. Houdini’s law.

If you invested in a hypothetical, no-fee S&P 500 fund 30 years ago and held it until today, about 45% of your portfolio’s gain would come from dividends.

You know those little payments you get in exchange for the hard work of holding a company’s shares? Those are dividends, and they can make a big difference, even if they start off as a few dollars a month.

Let’s get back to that 30-year example. Without dividends, your investment would be up a respectable 1,041% (or 8.5% per year). Reinvest company dividends over that time, and your return jumps to 1,887% (or 10.5% per year). That’s the difference between collecting $114,000 and $199,000 on a $1,000 investment.

Dividends may not add up to much every month. Maybe a latte or two. But they can snowball over time thanks to a little phenomenon called compounding.

On a spreadsheet, compounding can seem like an obvious superpower. And it is – if we weren’t humans easily lured into the trap of instant gratification.

A lot of investors spend their dividends instead of reinvesting them. This 2005 paper from the Helsinki School of Economics suggests that no more than 8% of Finnish investors reinvested their dividends over a seven-year sample period. Yes – these are overseas investors in a drastically different time for markets (reinvesting dividends is arguably easier than ever with today’s technology).

But overall, the findings speak to a truth that I anecdotally hear about way too often. People get distracted by high-growth hot stocks, even though a steady dividend payer and a little bit of discipline are all they need to build mind-blowing wealth.

What this means for you: Investing is more than just prices going up and down. You are an owner of a company, which gives you the right to a portion of its profits. Don’t overlook the power of dividends.

There has been just one day in the past 25 years when every S&P 500 stock closed lower.

We’ve been through a lot of painful days in recent history, yet there has only been one day when the pain was felt across every one of the stock market’s 500 biggest companies.

I’ll give you a moment to guess, but…I doubt you’ll guess it. My research colleagues couldn’t.

Ready?

August 8, 2011.

The first trading day after Standard & Poor’s cut its rating on American debt.

That day, the S&P 500 slid 6.7%, and the share price of every stock in the index, from Abbott Laboratories to Zions Bancorp, ended lower on the day.

Even weirder, this was the S&P 500’s ninth-worst day since 2000. Yet in every drop bigger than this one, at least one stock mustered the strength to move higher. Even on March 16, when the S&P dropped 12% in one day, Moderna and a handful of other stocks rose.

What this means for you: There are always winners and losers in every twist and turn. Unless Standard & Poor’s rug pulls you with a debt downgrade out of the blue (but even then, not every stock falls the same amount).

Thanks for reading!

Callie

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