Why You Shouldn’t Stress Over the Recent Pullback

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The market just ended a major winning streak…

Investing got a little too “easy” at the end of last year and the start of 2024. U.S. stocks were going up. Volatility ground to a halt. And the S&P 500 Index managed to rally for months.

Then we saw the first pullback. It wasn’t major – just an overall drop of 5%. (In fact, stocks have already recouped part of the loss.)

The decline ended an impressive run, though… The S&P 500 dropped in April after five months of going up. So stocks suffered their first monthly loss since October 2023.

But according to history, we should be celebrating the end of this streak. That’s because it points to near-certain gains over the next year… and upside of 13%.

Watching markets go up month after month feels great. It means you’re making money. Your account balances are on the rise.

It also means the worries that come with investing begin to fade. You start thinking the bad outcomes won’t happen after all… and that it’ll all work out. The animal spirits of investor excitement start taking over.

No streak lasts forever, though. Even in raging bull markets, stocks can fall. It’s completely normal. And it happened in April.

Stocks were in the middle of an impressive multimonth rally. Then, the market dropped 4% in April. Take a look…

This isn’t a major decline in the grand scheme of things. But it did end a five-month streak of monthly gains. And that kind of streak is rarer than you might think.

Since 1950, we’ve seen 32 other similar streaks. In other words, five-plus consecutive months of gains happen once every two years or so. (That’s just about as often as declines of 10% happen.)

Now, you might assume that breaking this kind of streak is bad news. But it’s actually the opposite. History shows that stocks tend to outperform after the streak ends. Take a look…

Long-term stock investing is one of the best ways to grow your wealth. Since 1950, the markets have returned 8% per year. But you can crush that return if you buy after a winning streak ends…

Similar setups led to 2.4% gains over three months, 6.4% gains over six months, and 12.6% gains over a year. That’s solid outperformance versus the typical buy-and-hold returns.

Plus, these situations have consistently led to profits. Stocks were higher a year later 94% of the time. You’d be hard-pressed to beat a win rate like that.

I understand that it’s tough to feel bullish after watching stocks drop. And I know that many investors are nervous about the new rally that has started this month.

You might be wondering if it’s about to end… or if the recent dip was the beginning of something much worse.

History shows that worrying is the wrong move, though.

Ending this kind of monthslong streak isn’t a bad omen. It tends to lead to even larger gains. And that means you should stay bullish, even during this market pullback.

Good investing,

Brett Eversole

This article was originally published on this site