To paint the picture, we start by presenting a few statistics for the S&P 500 for the past three calendar years in Figure 2.
Over the entire period, the index reached 114 all-time highs, but only one came in 2022 — on the first trading day of the year. Despite big gains in calendar years 2020 and 2021, only about half of the trading days over the three years delivered a positive return.
There were also large swings even within single trading days. The best days from the period offer a prime example of the speed at which markets can move and the risk of exiting the market during volatile times.
Over these three years, there was, of course, plenty of news and changing conditions that contributed to market volatility. The pandemic, the ensuing economic shutdown, rising inflation after the restart, and the Federal Reserve’s actions to fight it are just a few memorable examples.
In Figure 3, we put the period in greater context by presenting a selection of notable statistics showing where each stood at the end of 2019 and each year since.
The data again highlights how quickly things can go in a different direction. We can see this by comparing the end of 2022 to the end of 2019. For example, looking beyond inflation, expectations for stock market volatility are higher today, valuations for S&P 500 companies are lower, and the federal funds rate target is markedly higher (see dates denoted by yellow in Figure 1), as is the 10-year Treasury yield.
The full-period highs and lows help to unmask that the changes were anything but linear. Between these three years, we saw times of much higher volatility, much higher stock valuations and much lower interest rates than we saw at the end of 2022.
To offer a few more examples, consider that just within these three years, we saw the peak for negative-yielding non-U.S. debt, as several central banks in Europe and Japan set target rates below zero, and today we’ve seen that nearly fall to zero.
The U.S. dollar (USD) also strengthened over much of the period during a time of rising rates in the U.S., which weighed on international stock returns for U.S. investors. However, a softening dollar to close 2022 played a role in the S&P 500 underperforming non-U.S. stocks (MSCI ACWI ex U.S. Index) on the year by more than 3% — a result that may surprise investors who have watched the U.S. market win more often than not in recent periods.
All these statistics in Figures 2 and 3 highlight that investors and markets have endured a lot over the past three years. If you were approached at the start of 2020 and told what would happen over the next three years, would you have wanted to invest in stocks? Despite a down year in 2022, if you had held all the stocks in the S&P 500 Index for the full three years, you would have earned a cumulative return of nearly 25% with an average annual return of almost 10%. That’s a deal many investors would have likely accepted if given the foresight of the realized returns of the market to come.
Figure 4 offers a few additional takeaways. The first is that if we give too much importance to a single year, we may feel that today’s picture is bleaker than the reality for a long-term investor. One year is a relatively short period in the context of an average investor’s investment horizon.
Further, we can take some comfort in knowing that markets have overcome many tough times in the past and, over the long term, have played an essential role in helping investors achieve their long-term investment goals. Taking account of the longer three-year period helps to remind us of this.