With stock markets high and uncertainty all around, it’s a good time to speak to the value of long-term investing.
Markets and economy

Why talk about a market downturn now? Why not?

Commentary by
4 minute read
  •  
February 08, 2021
Markets and economy
Market volatility
Vanguard news
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Vanguard believes it’s always the right time to talk about long-term investing. Now might be a particularly good time, however, with stock markets near all-time highs and uncertainty all around. Better to pulse-check now than when markets are trending lower and emotions are running high.

You may already be wondering: Are we trying to brace investors for the prospect of a market downturn? The short answer is no—and yes. “No” because we can’t predict how the markets will perform in the coming days, weeks, or even months. “Yes” because we know that sometimes-significant downturns are a given in investing. Disciplined investors accept this and cling steadfastly to their goals to weather the occasional storms.

The economy and markets are sending mixed signals

As my colleagues Josh Hirt, Alexis Gray, and Shaan Raithatha wrote recently, most major economies remain in the throes of the COVID-19 pandemic, and Vanguard expects fiscal and monetary policy to remain supportive in the months ahead. But eventually, in a still-distant future, the unwinding of support as COVID-19 is addressed and economic activity correspondingly picks up will have implications for economic fundamentals and financial markets.

Central banks have signaled their intentions to keep interest rates low well beyond 2021, but forward-looking markets will eventually price in rate hikes. This means the low rates that have helped support higher equity valuations will eventually start to rise again. Somewhat higher inflation at some point is also a risk that we’ve been discussing and that we outlined in the Vanguard Economic and Market Outlook for 2021: Approaching the Dawn.

As we also noted in our annual outlook, equity indexes in many developed markets appeared to be valued fairly but toward the upper end of our estimates of fair value. To that end, the Standard & Poor’s 500 Index finished 2020 at a record high and has done so six more times already in 2021.

Volatility that has accompanied recent high-profile speculation in a handful of stocks and even commodities only adds to the uncertainty. (Vanguard’s chief investment officer, Greg Davis, wrote recently about how investors should respond when stocks get ahead of fundamentals.)

So let’s talk about the value of long-term investing

 

Note: Intraday volatility is calculated as the daily range of trading prices ([high−low]/opening price) for the S&P 500 Index.

Sources: Vanguard calculations, based on data from Thomson Reuters Datastream.

Vanguard isn’t in the business of calling the markets’ next moves. We are in the business of preparing investors for long-term success. And that means guiding them to focus on those things they can control: having clear, appropriate investment goals; maintaining portfolios well-diversified across asset classes and regions; keeping investment costs low; and taking a long-term view.

Vanguard’s Principles for Investing Success discusses each of these principles in detail. For a time like this, I’d pay particular attention to the last of them. As the illustration above shows, market volatility is a fact of life for investors, and so are market downturns. But the market has typically rewarded disciplined investors who take a long-term view.

It’s good guidance regardless of whether a downturn may be on the horizon.

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Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.