Stocks have had a tough time in recent months – and the reason why is no mystery. Long-term interest rates are soaring…
Higher long-term interest rates make it more expensive for companies to borrow money. They also make other assets more competitive with stocks, which can drive down prices.
Sure enough, those headwinds have led to painful declines. In fact, the market fell for four straight weeks – until earlier this month, when it finally broke that losing streak.
That's a rare move. If you're expecting more pain after the recent slide, though, you might be making a mistake... because history shows stocks are likely to outperform from here.
Let me explain…
Longtime readers know how important it is to understand the prevailing trend.
Fundamentals matter in the long term. But if you want to know where stocks will go next, you must understand what they've just done.
Tracking trends doesn't have to be complicated, either. Most of the time, you can look at a chart and know instantly whether prices are moving higher or lower... And lately, stocks have certainly been moving lower.
Heck, again, the S&P 500 fell for four straight weeks into September. The losses felt relentless... But the index finally broke its downward streak earlier this month. Take a look...
This kind of consistent downturn is far from common. We only saw two losing streaks this long during last year's bear market. And they've only happened 80 times since 1950, or around once a year.
That makes the recent downturn worth examining. So I tested to see what has happened after similar declines – and the results were surprising. Check it out...
Normally, we'd expect more losses in the stock market after this kind of setup. But the results show otherwise.
Since 1950, losing streaks of four or more weeks led to 5% gains over six months and 9.8% gains over the following year. So not only did stocks not lose money going forward... but they also outperformed a typical buy-and-hold strategy.
What's more, stocks were higher a year later 76% of the time. So despite the recent declines, the odds are still in favor of gains from here.
That has a lot to do with the market's upward bias over time. It's a good reminder that even this recent stretch of weekly losses isn't the end of the world.
Now, that doesn't mean you should be complacent... But it does mean that you don't have to panic right now. And if history plays out as expected, you still want to own stocks today.
"Broad investor fear is spiking," Matt McCall says. Activity in the options market is showing us that folks expect stocks to keep falling. However, over the past two decades, fear like this has been a reliable sign that the next rally could be around the corner... Read more here.
"The last time investors were this fearful, it meant there was nobody left to sell," Sean Michael Cummings writes. Two indicators are flashing "oversold" signals today. That means folks have panicked out of stocks – but we should think twice before doing the same... Learn more here.