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Asset Allocation Insights

Investing in Equities Amid a Crisis

Timothy C. Murray, Capital Markets Strategist

Key Insights

  • An analysis of previous market sell‑offs implies that timing the market bottom perfectly may not be necessary to achieve a positive outcome.
  • In our view, patient, long‑term investors could potentially reap gains whether they buy stocks early or late in a downturn.

During periods of market stress, it can be incredibly difficult to gauge when to invest in stocks in order to benefit from the pursuant recovery. Our multi‑asset team’s recent analysis of prior market sell‑offs concluded that investors may not have to time the market bottom perfectly to have a positive outcome. We reviewed daily pricing data for the S&P 500 Index over 90 years from January 3, 1928, to January 31, 2020, and found 17 instances where the index declined by 15% or more.1 We then examined the performance difference between the stock index and U.S. bonds during those drawdowns and subsequent recoveries.

We discovered that, on average, stocks outperformed bonds over the ensuing 18 months whether a hypothetical investor bought them six months before the market bottom or six months afterward. Results were positive either way, but hypothetical purchases made after the market bottom typically resulted in stronger gains. However, results over shorter‑term horizons (six and 12 months) were mixed.

How Early Is Too Early?

Forward Relative Returns1 for U.S. Equities vs. U.S. Bonds2

Past results are not a reliable indicator of future results. Not representative of actual investment results.

US Equities are based on daily price returns for the S&P 500 Index, January 3, 1928, through January 31, 2020. Source: Standard & Poor’s (see Additional Disclosure).

Chart shows the average subsequent returns at different time periods before, after and at the trough (market bottom) over the 17 instances of the S&P 500 Index decline.

1 Relative returns represent the outperformance or underperformance of stocks compared to bonds.

2 Fixed income data use an estimate of daily interpolated Ibbotson returns for the earlier time period from January 3, 1928, to December 29, 1961, and 5-yr. U.S. Treasury total returns where daily data are available from January 2, 1962, to January 31, 2020.

We also found that “hit rates”—how often relative returns were positive for stocks—were higher closer to the market bottom. Over an 18‑month horizon, hit rates were higher, on average, for stocks bought three months before or after the bottom versus six months before or after the bottom. Once again, buying late provided slightly better relative results.

Our study suggests that investors need not be overly focused on timing market bottoms perfectly. We believe that patient investors with long‑term investment horizons could potentially benefit regardless of whether they invest in stocks early or late in a downturn.

1 To identify what constitutes a trough or major drawdown event, we used S&P 500 Index price data from January 3, 1928, to April 3, 2020, to calculate the drawdowns from a previous peak (each peak being an absolute peak) and then identified the dates with the largest drawdown corresponding to each peak. From that, we implemented a 15% maximum drawdown threshold in order to find the historic dates that have had major drawdowns.

Additional Disclosure

Copyright © 2020, S&P Global Market Intelligence (and its affiliates, as applicable). Reproduction of any information, data or material, including ratings (“Content”) in any form is prohibited except with the prior written permission of the relevant party. Such party, its affiliates and suppliers (“Content Providers”) do not guarantee the accuracy, adequacy, completeness, timeliness or availability of any Content and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such Content. In no event shall Content Providers be liable for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of the Content. A reference to a particular investment or security, a rating or any observation concerning an investment that is part of the Content is not a recommendation to buy, sell or hold such investment or security, does not address the suitability of an investment or security and should not be relied on as investment advice. Credit ratings are statements of opinions and are not statements of fact.

Important Information

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

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defined under National Instrument 45-106. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services.

For Institutional Investors only.

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