Financial Professionals

March 18th, 2024

Waiting for the Market to Drop Before Investing? Read This First.

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The U.S. stock market remains strong. Mega-cap technology companies have propelled index returns higher since last October, but the rally has also gained breadth recently. The S&P 500 equal-weighted index, for example, has also risen to a record high, and approximately 20% of S&P 500 stocks are trading at or near 52-week highs. That’s the highest percentage we’ve seen since May 2021.1

In late February, I wrote a column about strong market returns making investors worried. I wrote that seeing headlines about new all-time highs can easily “give the impression that share prices are getting too frothy—especially considering that interest rates are still high, inflation is still above target, many Americans don’t feel great about the economy, and the geopolitical outlook is one of uncertainty and instability.”

In that column, I debunked the idea that it is dangerous to invest in a stock market trading at an all-time high. All-time highs tend to lead to many more all-time highs, I argued and empirical data suggests that investors can experience solid 1-year average forward returns even when investing at all-time highs.

Some investors still prefer to wait.

The thinking is that the market will surely deliver a correction or a sizable dip to follow such a strong rally, which would then afford investors a better entry point than investing at all-time highs. This thinking is also backed up by data – since 1980, the S&P 500 has experienced an average intra-year decline of -14.2%, even as the index finished positive in 33 of those 44 years.2 Corrections are normal, natural, and common.

So then, what’s the harm in waiting for a correction to “buy the dip,” instead of committing capital to a strong stock market trading at all-time highs?

The answer is that this approach means engaging in short-term market timing, which I think is the antithesis of how long-term investors should approach the markets. If your long-term goals are to generate growth or income or both, then what will ultimately matter is how much time you spend invested in the market – not how well you time the market. In my view, trying to time entry and exit points based on short-term market fluctuations will hurt total return over time more than it will help. Investors are far more likely to be wrong more often than they are right.

There is also the matter of what happens when you miss the best days in the market, which can of course happen if you’re frequently attempting short-term market timing. Consider the performance of the S&P 500 over the 20-year period from January 1, 2004 to December 29, 2023, versus what happened to an investor who missed the best 10 or 30 days in that period3:

Recall that remaining fully invested during this 20-year period meant absorbing the entire downside shocks of the 2008 Global Financial Crisis, the 2020 pandemic bear market, and the 2022 bear market. Yet missing just the 10 best days in the market meant having annualized returns nearly slashed in half, and missing the 30 best days meant earning basically no return. It’s difficult to fathom how short-term market timing is worth the risk, in my view.

Bottom Line for Investors

Here’s another way to critically think about the decision to wait for a market correction before investing. Let’s say your goal is to wait for a -10% or a -15% dip, which historically is a healthy correction range. Given current levels (call it 5,100 on the S&P 500), this means you’re waiting for the S&P 500 to fall to 4,590 (-10%) or 4,335 (-15%). The S&P 500 traded at those levels in June and November of 2023. Were you also waiting on the sidelines then? At what opportunity cost?

At the end of the day, I understand the difficulty of investing when the market has been rallying strongly for what seems like a long period. There’s the difficult feeling that you may be investing at a local top, which is a tough pill to swallow especially if the market enters a correction just as you invest. But if your goals are long-term, and you’re investing this money for the next 10, 20, or even 40 years, then timing does not matter as much as our minds lead us to believe, in my view. It’s time in the market, not timing the market.

Disclosure

1 Wall Street Journal. March 11, 2024. https://www.wsj.com/finance/stocks/it-isnt-just-big-tech-propelling-gains-in-the-stock-market-anymore-1b861482?mod=hp_lead_pos3

2 J.P. Morgan. 2024. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

3 J. P. Morgan. 2024. https://am.jpmorgan.com/us/en/asset-management/adv/insights/retirement-insights/guide-to-retirement/

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
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