Don’t Bail on Stocks After One Rough Month

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It’s not often that you get to witness the follies of investor psychology play out in real time. But it’s happening right now…

If you’re looking for problems, you’ll always find them – and most investors do just that. They’re generally worrywarts. And they worry even more as stocks rise… because they’re afraid the good times are about to end.

Bull markets endure, though. They tend to push higher despite those fears. It’s the old saying in action – that stocks climb a Wall of Worry.

We’re seeing this behavior right now, based solely on the market’s recent returns. Stocks racked up massive gains through July, followed by weakness in August.

Last month’s losses might seem like a bad omen. But history shows this is a rare – and promising – setup. And it could lead to 17% gains over the next year.

Let me explain…

Stocks roared higher through the first seven months of 2023. The S&P 500 Index was up 19.5% through the end of July. We haven’t seen a better start to the year since 1997.

To investors, it was all smooth sailing. Then, August happened…

Stocks dropped 2% last month. That’s not a massive drop. But it was the first losing month since February. And that twinge of pain created a new Wall of Worry.

Now, many investors are questioning if this bull market can last. We’ve seen this kind of setup before, though…

I’m talking specifically about big gains through July, followed by losses in August. Take a look at how this move played out recently…

This kind of market action isn’t common. We’ve only seen nine other cases of stocks rallying 19.5% or more from January through July since 1928. And just like this time, stocks usually fell in August after that kind of rally – pulling back in six of those nine instances.

Investors are scared that those losses indicate more pain to come. The Wall of Worry is telling them that the good times went too far and more declines are likely.

But based on history, that couldn’t be further from the truth…

You see, after similar setups, stocks ended up higher a year later 100% of the time. And the typical return was darn impressive. Take a look…

Investing in stocks for the long run is a great investment strategy. After all, the S&P 500 has returned 6% per year over nearly a century of data. But if you buy at the right time, you can crush that return…

Buying after moves like this led to a typical gain of 5.2% in three months, a 12% gain in six months, and a 16.7% gain over the next year. That’s nearly triple what stocks typically return in the following year. And again, this setup has a perfect track record.

Investors who are focused on finding problems won’t want to see this. They’ll view the weak month for stocks as the start of something much worse.

We know better, though…

Stocks are climbing the Wall of Worry for now… But history shows that could lead to double-digit gains over the next year. And that’s one more good reason to stay long right now.

Good investing,

Brett Eversole


This article was originally published on this site