S&P 500 has fallen off a cliff. What now?

What a week.

Second straight week of red for S&P 500. Losses for four out of five sessions in the past week. A weekly loss of 4.65% this week has now put S&P 500 in a position where it is 23.3% off the ATH.

All 11 sectors within the S&P 500 closed in the red for the week with the energy sector leading the losses. If you are interested to see how these 11 sectors fare against the index YTD, here is the chart.

(Source: https://seekingalpha.com/news/3885834-sp-500-posts-over-4-weekly-loss-after-fed-rate-hike-oil-stocks-top-losers?source=content_type%3Areact%7Csection_asset%3Amore-on%7Csection%3Aright_rail%7Cfirst_level_url%3Aarticle%7Cline%3A1%7Cpos%3Aundefined)

XLE- Energy, XLY- Consumer Discretionary, XLRE- Real Estate, XLB- Materials, XLF- Financials. XLC- Communication Services, XLI- Industrials, XLK- Information Technology, XLV- Health Care, XLU- Utilities. XLP- Consumer Staples.

YTD wise, XLE (Energy), XLU (Utilities), XLP (Consumer Staples), XLV (Health Care), XLI (Industrials), XLF (Financials) have outperformed the index.

The recent drop happened in the wake of the Fed raising the key lending rate by 75bps to 3-3.25%. It appears that inflation is still hard to tame and expectations of a 4% rate by the end of the year is very likely. In fact, the rate might go even higher than 4% in 2023. Locally, even DBS and UOB have ceased fixed rate home loans for now.

In August, I wrote an article titled "Start of a bull market? Be Aware of this." Back then, the S&P 500 was sitting at 4,200+ and on an upward trend from the June lows. I wasn't fully convinced a bull run was starting then and hence I wrote the article. It is just interesting to note that the index went on a decline since then and we are now looking back at retesting the June lows again. This goes to show how volatile the market has been in recent days.

So then again? What now with the S&P 500 falling off a cliff again amid all the high interest rates?

I ran an interesting poll about this in my Telegram a few weeks back. With many people rushing to open deposit accounts with banks amid the high interest rates, I thought that it would be good to understand if people prefer to put their money in deposit accounts with high interest rates or continue to invest in equities. Below are the results.

Despite record high interest rates for deposit accounts, most prefer to continue their regular DCA into equities and not hold cash.

Is that a wise thing to do?

Well, history will say yes. But that depends on your time horizon.

(Source: https://seekingalpha.com/article/4542623-is-spy-good-investment-during-recession)

This is a chart showing the S&P 500 total return over the past few decades. As a lot of articles have pointed out, the index always recovers to make an ATH. With the index now 23% off the ATH, it will just be a matter of time before the index makes it ATH again.

(Source: https://www.cnbc.com/2020/02/27/heres-how-long-stock-market-corrections-last-and-how-bad-they-can-get.html)

The market on average took 14 months for the full impact during bear markets and another 24 months to recover. If we take this average value and assume that there will be another 38 months to go before S&P 500 makes another ATH, we are probably looking at an annual return of 6-7% by investing in S&P 500. I'm pretty sure no bank will offer you a deposit account with such an attractive interest rate.

Of course, the market certainly still has room to fall further. It won't be surprising to see another 10% fall from here in a typical bear market. Hence, there is a need to be able to stomach that volatility. But that won't change the fact that investing in the index now will give you attractive returns if your investing time horizon is long enough. It's just that your returns will be even more attractive if the fall continues.

And that brings us to the golden question. Should you then wait for the market to drop further before investing then?

There is a recent article on OfDollarsAndData explaining that you shouldn't wait as time in market often triumphs timing the market. Through the article, you are able to realise that the only time it makes a difference in your portfolio returns over a long period. when you wait is when the market drops 40% or more. Are you confident that the market will absolutely drop 40% this time round for you to wait and time the market? I don't think anyone has a crystal ball to be able to predict what's coming next.

So yes, S&P 500 has fallen off a cliff. But nothing changes if you are a long term investor who regularly invests in the index. Just ignore the noise and you'll do well.

I also do share additional content in my Telegram channel. Anonymous polls are also held in this channel to give you a perspective of what do the crowd thinks on certain financial/investment themes. Do join the channel if you are interested.