DALLAS — I used to run track. I have a lot of red, yellow, green and white ribbons to prove it. Seriously, not one blue ribbon. Still, even I know that a sprinter should be moving faster than a long distance runner. But earlier this year that didn’t happen in the stock market.
By one recent count, there were 5,866 U.S. companies that sell stock. It would be a lot to keep up with all of them, so an index, like the Dow Jones Industrial Average, the NASDAQ, or the S&P 500 keeps tabs on a smaller basket of stocks. Depending on whether those baskets of stocks are up or down, we get an idea of how the broader stock market is doing.
The death cross
So back to our running analogy. The sprinter in a market index would be how much its basket of stocks is worth if you look at just the most recent 50 days. The long distance runner would reflect how much the basket of stocks is worth over the last 200 days. In February and March of 2022, in each of the major stock market indices the sprinter (the 50 day moving average) fell below the pace of the long distance runner (the 200 day moving average). That’s called a death cross.
Some investors run away from the market when that happens, because historically, it has indicated that more losses are to come. But others, as explained in this article a few months ago, say that death crosses in recent times have signaled the damage is about done, and it might be a good time to buy more just before a rebound.
What's next?
An analysis reported by Barron’s found that two out of three times when the S&P 500 experienced a death cross, 12 months later the index posted gains. Almost the same story for the Dow: 12 months later--gains two-thirds of the time. No one really knows if that will happen this time. But it is a good time to assess your investments, and maybe talk with an advisor.
But another analysis cited by Yahoo Finance found that historically when the S&P 500 experiences a death cross, it is common for the index to be up three months later. But that didn't happen with the S&P 500 death cross this year. The index was down three months after the event. Investors might be wondering if this time is different. Will stocks slide further? Or will they recover and turn positive by the 12-month post-death cross point early in 2023?
This chart may make some think twice about exiting the stock market
If you have a 401(k) or IRA, you may have already hit the exits and pulled your money out of stocks and gone home, never to think about it again…only to keep thinking about it every day.
You might be right to obsess over a move like that. Fidelity has a flashing red warning light for anyone looking to cash out. The published a chart that assumes you invested $10,000 in stocks in January 1, 1980. When they published the chart last year, the chart estimated your hypothetical gains if you had stayed invested for ALL of the days stretching from the beginning of 1980 through March 31, 2021.
If you stayed in the whole time, the analysis hypothesizes your initial $10,000 investment became a little more than a million dollars. But if you pulled your money out along the way and missed out on just the best five days the market had in all those years, it estimates you would have ended up with about $676,000.
If you missed the best 10 days of the market, the model predicts your money would have grown to about $487,000. That’s less than half of the big nest egg you might have amassed if you had just stayed in for all the days.
And the final account balance goes down from there just depending on how many more of the market’s ‘best days’ you miss. It can be hard to stay in the market when there is volatility and you see account balances falling.
The point Fidelity is making, though, is that it is even harder to come out on top if you withdraw at the wrong time and miss out on big gains.
If you haven’t done it already, you should at least be reviewing your investment choices, maybe tweaking them, and talking with an advisor.
