Financial crisis, bear markets, and panics, they all feel the same. Our primitive human mind is hard wired to safeguard and to protect us. And the opposite can be true - greed. In the span of 3 weeks, market participants (not investors) have moved from a state of panic to a state of euphoria.
The S&P 500 declined almost 9% before bottoming out to rise vertically another 9%. We all know a 9% rise does not bring you back to square one, nonetheless, it's a solid rally. In fact, the S&P 500 is now only about 1% away from hitting a new all-time high - quite remarkable.
And if you've been bearish or pessimistic about the market given the overwhelming strength of the tech sector, well, I'm sorry to tell you that the S&P 500 equal weight index is at all-time highs. Although Nvidia is 5% of the stock market, it's less than 1% of corporate profits. This rally is bigger than Nvidia.
When it comes to investing, panic creates opportunity. Case in point, the Japanese stock market is up about 23% from its bottom.
Declines of 5% or 10% in the stock market are completely normal. In fact, the average intra-year decline is 14%. I put together the chart below which shows the max drawdown in the stock market each year versus the calendar year return. What stands out to me is the fact that every year since since 1980, the stock market has had an intra-year decline 100% of the time, yet has ended the calendar year down only 23% of the time. In other words, the stock market is up 77% of the time.
Understanding the behaviour and patterns of the stock market in of itself is an edge, it shouldn't be, but it is. Play the long-game.