What the S&Ps ‘lost decade’ can teach us about market down-days

While stocks are more likely to close up than down, on average ‘down days’ can be packed together leaving investors woefully underprepared to weather the bout.


Markets are unpredictable at heart. This statement seems exceedingly obvious, and yet, when investors commit their money to the stock exchange, the expectation is often that their investments will move up in a straight line. Of course, at some level, they understand there will be ‘some’ volatility – but somehow, this is taken to mean the occasional ‘down’ day. On aggregate, the expectation is still that things will trend up.

The lost decade and other ‘going nowhere’ market examples

Analysis shows that the S&P 500 has on average had more up (closing higher) than down days (closing lower) – but the split will vary over time. For example, over the period from 1996 to 2016 the S&P 500 Index on average closed higher 53.29% of the time and lower 46.71% of the time. From 2016 to 2021, this ratio changed to 54.86% up days vs 45.14% down days. So, on any given day, shares are more likely to close up than down. What data like this does not reveal, however, is that “down days” can often be packed tightly together, or that the ups and downs can even cancel each other out for protracted periods of time, leaving the market “going nowhere”. For example, S&P 500 delivered a “lost decade” between January 2000 and December 2009, returning -0.95% p.a. over the period. It is also worth remembering how disorienting this experience was to investors at the time, since it stood in stark contrast to returns of around 10% p.a. investors were used to seeing before 2000.

Investors quick to sell when markets plunge

While market behaviour makes for a fascinating discussion (and source of debate), what is often overlooked is the extent to which investor behaviour determines the outcomes investors ultimately realise. Despite the best intentions, many investors are woefully unprepared for anything but the mildest bouts of volatility. It is easy to acknowledge that stocks are volatile in an unemotional and reasoned fashion when conditions are calm, but it is far more difficult to remind ourselves of this when markets plunge sharply during a crisis, as it did in March 2020, or when they fail to deliver returns as expected over extended periods of time, as they did for the S&P 500 during its lost decade, or the JSE during its lacklustre period between early 2015 and early 2020. Confronted by clear evidence that they ‘got it wrong’ or their investment strategy doesn’t ‘work’, investors are quick to sell out of such positions (often hiding out in cash until things improve).

The missed market rebound opportunity

One well-documented problem with this kind of behaviour is that investors turn paper losses into real ones when doing so, and often miss out on a market rebound (which also tends to happen unexpectedly in the case of market selloffs and crises). However, what is less often talked about, is the tendency to overlook the investment manager’s philosophy when deciding to what to do next. A manager’s investment philosophy will determine how they view the world, and where (and how) they will identify investment opportunities. They may already have factored prevailing market conditions into their outlook, and may, in fact, be exploiting market weakness to deliver future returns. One man’s loss is, after all, another’s buying opportunity. However, investment philosophies require sufficient time for views to come to fruition, as markets do not always recalibrate to align to expectations on demand. To reiterate my opening statement: markets are unpredictable at heart – and the past decade or so provides another stark reminder of this, as growth has continued to outperform value far longer than expected, until… it no longer did.

It’s not a stock market – but a market of stocks

The unpredictable nature of stock exchanges reiterates why considered financial planning will always remain a valuable counterpart to skilled investment management. While market behaviour tells one part of the story, it is often investor behaviour that has the bigger say in the how the story ends. More importantly, it’s also worthwhile remembering the truism that it’s not ‘a stock market’ but ‘a market of stocks’. There are always opportunities for astute investors, but they are often hiding just outside the fringes of popular indices. And that is why it remains important to understand your investment manager’s investment philosophy, and to ensure you are positioned to benefit from investment positions – when they come to fruition.

Anet Ahern is CEO of PSG Asset Management.

Harry Byrne

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