Swing shift: Wall Street’s gyrations no cause for surprise

NEW YORK — What a wild ride. The stock market hasn’t been this crazy since — a couple of years ago.

Yes, stocks have swerved scarily this year as Wall Street comes to grips with a Federal Reserve no longer doing everything it can to prop up markets. The average day last month saw a swing twice as wide for the S&P 500, from its low point to its high, as a year earlier. In one dizzying day, it careened from a 4% loss to a small gain.

Perhaps more jarring was that the S&P 500 flirted repeatedly with a 10% drop from its record set on the first trading day of the year. It’s a cold slap for the millions of people who got their first taste of investing in recent years. Until the last few weeks, anyone who began dabbling in the market after March 2020 had known a time where stocks pretty much only went up.

The recent shakiness, though, shouldn’t come as a surprise to anyone. This is what stocks do, and it’s the price that investors have paid for their historically strong returns through the long term.

That 4% swing in one day last month? In 2020, when the pandemic first struck, investors saw 20 such stomach-churning days. In 2008, during the throes of the financial crisis, there were 49 such days, according to S&P Dow Jones Indices. That’s an average of four every month.

And a 10% drop for the S&P 500 isn’t a rare thing either. They tend to happen every couple of years or so, with 23 of them during the past 50 years. Last month’s swoon didn’t even count as one of them, because the S&P 500 has yet to close a trading day at least 10% below its record. It’s come close, but each time it pulled upward enough at the end of the day to stay above that threshold.

Why would anyone put themselves through such tumult? Because stocks have proved to be some of the best investments for the long term, as long as an investor can hang on through the volatility and resist the temptation to sell. After every major downturn for U.S. stocks, from the Great Depression to the 2000 dot-com bubble to 2008’s near-collapse of the financial system, the market has eventually gone on to recover all its losses and mark new peaks.

Following each of the S&P 500′s drops of at least 10% during the past 50 years, it’s climbed an average of 83% in the ensuing five years, according to Robert W. Baird.

Broaden the horizon out to 10 years, and the S&P 500 almost always rises over that timespan, with the decade following the 2000 dot-com bubble a notable exception. That’s why the general rule of thumb is for investors not to have money in stocks that they’ll need to use within the next few years.

“It can be a brutal combination when the market is experiencing volatility, no matter how common or how normal it may be,” said Ross Mayfield, investment strategy analyst at Baird Private Wealth Management.

“In the end, one of the super powers of the individual investor is the ability to focus on the long-term.”

Of course, this bout of volatility might be different than all the past ones.

The market has been shaky as investors rush to get ahead of moves by the Federal Reserve to shut off the support it’s been pouring into the economy since the pandemic began. The Fed is likely to start raising short-term interest rates in March, among other moves that will make borrowing money less easy and leave less money sloshing around the economy.

The market has seen such rate-hike campaigns before, and they’ve been the cause of plenty of past 10% drops for the stock market. Wall Street also already knows what it’s like for the Fed to turn off the money printer it used to buy bonds to support the economy, and to then suck out some of those dollars sloshing around the economy. But never before has the Fed been doing both such things while a pandemic is still raging and inflation is at a nearly four-decade high.

That’s why many on Wall Street expect big swings to continue to shake the market, even if stocks have calmed down a bit in recent days.

But that shouldn’t come as a surprise to any investors in stocks.