Markets are down, but these charts explain why investors don’t panic

But unfortunately, that regression doesn’t seem to be the devil we know.

Even the investors themselves are different. Stimulus checks in the age of Covid, high unemployment and trading platforms targeting younger generations have introduced a whole new set of bullish traders to the markets. About 20 million people have started investing in the past two years. A survey conducted by Schwab in 2021 found that 15% of all investors in the US stock market said they first started investing in 2020.

Leo Grohosky, chief investment officer at BNY Mellon Wealth Management, said these market players have never gone through a period of high inflation and high interest rates, and the sudden change in the economic environment is adding to the market turmoil.

“What we’re seeing is dumping investors who have been overwhelmed with cash. They first bought and asked questions on meme stocks, SPACs and NFTs, and there was a lot of what I call random buying. Now we’re seeing some ‘random selling,'” he said.

Joshua Brown, co-founder and CEO of Ritholtz Wealth Management, said in a recent blog post that most investors aren’t ready for this trading environment. “This is one of the most insidious environments I have ever seen, and I traded during the crash of the Internet, 9/11, Enron, Tyco, WorldCom, Lehman” and a host of other crises.

As Berkshire Hathaway’s Charlie Munger said during the company’s recent shareholder meeting, the stock market has become “almost an obsession with speculation.” “We have people who know nothing about stocks, and they are being advised by stockbrokers who know less,” he added.

However, while markets are flirting with bearish territory – when a major index drops 20% or more from its recent high – some technical analysts don’t think there is much to worry about. These three charts show why it may not be time to press the panic button. At least not yet.

Bull markets earn more than bear markets lose

The 14 bull markets since 1932 have returned an average of 175%, while the 14 bear markets that started in 1929 have led to an average loss of 39%, according to data from S&P Dow Jones Indexes.

Downturns are also much shorter than bull markets: Since 1932, bear markets have occurred, on average, every 56 months, or roughly four and a half years, according to the S&P Index. But they also last about one year on average, which makes them much shorter than the corresponding bull cycles.

If we avoid a recession, there could be a significant bounce back,” said Liz Young, SoFi’s head of investment strategy.

In the periods since the 1970s when the S&P 500 fell more than 10% without a recession, stocks have jumped within a few weeks of the decline. Today the markets are trading as if they are already pricing in a recession – so if the Fed is able to stage a soft landing, the returns could be big.

Historically, constant withdrawals aren’t a terrible entry point

The S&P 500 and Nasdaq Composite indices entered their seventh week of losses on Friday. This is the longest consecutive period of market turmoil since 2001 and 2002 for the S&P and Nasdaq, respectively.

But past returns do not predict future performance, and recoveries from long periods of loss for the S&P are often positive. When analyzing 6-week loss periods from the past, there was an average return of over 10% after 1 year.

Rocky White, chief quantitative analyst at Schaeffer’s Investment Services, wrote that in the four weeks following the losing streak, the S&P rose 1.57% on average, beating the typical return of 0.67%.

“When you go out for a year, there’s not much difference in returns, so long-term buy-and-hold investors have no reason to panic,” White added.

The volatility is not noticeable

To this point, we may be approaching a bear market, but we are not in a panic. Even with the S&P 500 slipping about 20% from its highs, volatility is still below its May peak.

“When you look at the volatility index [VIX] It’s not as high as you might expect, given the amount of uncertainty we have now, said Howard Silverblatt, chief index analyst at S&P Dow Jones Indices.

The volatility index, widely known as a Wall Street fear gauge, is much lower than it has been during the two previous recessions. “We are seeing a better mix of bulls and shorts than in the past,” said Silverblatt, which is a good sign that the market is looking to find support.

What the markets are now witnessing is a kind of trader capitulation, said Grohusky of BNY Mellon.

“If you are fortunate enough to have some money to invest, I think waiting for the magical surrender day may be a missed opportunity,” Grohosky said.

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