After a steady rebound from its April drop, the S&P 500 (SNPINDEX: ^GSPC) hasn’t notched a new record since early June. That doesn’t mean it won’t do so soon. But it does signify market hesitation in a challenging time.
There’s a lot going on right now, and much of it doesn’t look great for the economy. High inflation is still raging, and the Federal Reserve is keeping interest rates steady to combat it. The ceasefire with Iran is no longer in effect, and oil prices are spiking again.
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Those are just the macroeconomic headwinds. Next, throw in the largest initial public offering (IPO) ever, with Space Exploration Technologies‘ debut a month ago, the SK Hynix IPO last week, and the expected IPOs of Anthropic and OpenAI later this year. Big IPOs tend to happen at bull markets at highs, and there’s plenty of froth. The cyclical-adjusted P/E (CAPE) ratio is at levels seen only once before, which precipitated a market crash.
Is that where the market’s headed? No one can know, but if it does happen soon, there’s one thing investors shouldn’t do, according to history.
Play the long game
When there’s a market crash, investors can be tempted to bail. In fact, that’s part of how the market crash works. Something spooks the market, legitimate or not, and investors start to pull out.
There’s no doubt about the fear that can grab investors when you see portfolio gains evaporate before your eyes, and exiting before the low can seem like the smart move at the time. Of course, you don’t know when the low is, so any lower point can seem like the right time.
However, history has demonstrated that the market winners are those who stay in; the one thing you shouldn’t do in a market crash is sell. That’s because you can’t time the recovery. As soon as you sell, paper losses become real losses, and your investments lose the opportunity to rebound.
The fact is, it can take a long time for the market to recover. The last time the CAPE ratio reached a high, in 2000, the S&P 500 fell for three years in a row and lost 40% of its total value. Any time over that period could have seemed like the right time to get out, because the recovery was an unknown.
However, that was more than 20 years ago. Since 2003, when the benchmark index finally reported a gain after three years, it has gained a whopping 761%.
