Bumpy ride ahead for markets? If so, that’s quite normal

It’s been a sluggish start to the year for the US sharemarket.

The S&P 500 is up slightly, but it’s well behind the UK, Europe, Japan and emerging markets.

It’s also been more volatile of late, having fallen for five of the past eight weeks.

It feels like it could be another bumpy year, and we might even see a bigger sell-off in the months ahead.

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That’s not something to be afraid of, and it doesn’t mean the market can’t put in another solid performance.

Intra-year sharemarket drawdowns (that’s financial jargon for declines from a recent peak) aren’t uncommon.

In fact, a fall of at least five per cent at some point during any given year is quite likely.

In the 76 calendar years since 1950, the S&P 500 index has slipped by that magnitude from a recent peak on seven out of ten occasions.

We’ve seen double-digit drawdowns roughly every second year, and the average decline for all years since 1950 has been 12.1 per cent.

While the reasons behind them are always different, declines like this are par for the course.

Last year it was tariffs, this year it could be something completely different, or nothing at all.

Since 1950 US shares have delivered positive returns in 60 out of 76 years.

That’s a healthy 79 per cent hit rate, but even in those up years the average drawdown was still 8.7 per cent.

Things can be a little more challenging during midterm election years, like this year is.

US midterms are held every four years, and there have been 19 since 1950 (they’re on the same schedule as the football world cup).

In those 19 years 12 have seen gains, making for a more modest hit rate of 63 per cent.

Average returns are slightly lower during those years too, while the average drawdown is higher at 15.6 per cent.

That’s understandable, as the threat of potential policy change leads to nervousness and uncertainty.

There’s more than eight months to go until the midterms, which will take place very close to our own election here in Aotearoa.

All 435 seats in the US House of Representatives will be contested, as will 35 of the 100 seats in the Senate.

The president’s party typically loses seats in both the House and Senate in midterm elections, with the negative effect usually more pronounced in the House (because all House seats are up for re-election).

Trump’s Republicans currently control both the House and the Senate, and most people are expecting them to lose control of the House.

Volatility is the rule, rather than the exception, and financial markets have historically performed well in spite of this.

Over those almost eight decades the S&P 500 (including dividends that were reinvested, rather than spent) has delivered an annual return of 11 per cent.

You don’t get that without living through the regular ups and down though, that’s the catch.

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