In order to be a successful long-term investor, the one maneuver you need to master is that of separating your emotion from your investment strategy. It may not be easy. In fact, at times it seems nearly impossible. When the news is all negative and your statements show declines, it doesn’t feel good. You may want to cut your losses and stop the bleeding. However, history has shown us that is not the best thing to do.
If we look back to 1971, there have been 8 peaks of Consumer Confidence (when Americans feel really good about the economy) and 8 troughs (when we feel distraught and concerned). You would expect that the stock market wouldn’t perform well in times when consumer confidence is low, because we all know that our economy is very much consumer driven. However, if we look at the stock market in the 12 months following each of the peaks and troughs, we see the opposite is true. After the sentiment peaks, we have had a mixed bag of stock returns, with an average return on 4.1% in the next year. After each of the sentiment troughs, earnings have been double digit positive every time, producing an average of 24.9%.
In the summer of 2022, we reached the lowest sentiment levels since 1980 and things don’t feel good. Inflation is high, the stock market is down, and the “R” word is all over the nightly news. Market history tells us that is actually a buying opportunity. Now, you may not be inclined to add to your portfolio in a market that doesn’t feel good, but at least have the courage to stick with it. If you are a long-term investor, things will turn around and your courage will be rewarded.
Source – JPMorgan Guide to the Markets (September 29, 2022), Slide 25 - “Consumer Confidence and the Stock Market”