Investing

Market volatility near Super Tuesday is normal — here's what history suggests will happen

Twenty/20

The U.S. stock market is still reeling from its worst week since the financial crisis, as both the S&P 500 and the Dow Jones Industrial Average fell more than 11%. The S&P 500 jumped 4.6% on Monday for its best day since December 2018, and the market veered between lower and higher in trading by mid-Tuesday, after the Federal Reserve announced an emergency rate cut of half a percentage point in response to the growing economic threat from the coronavirus.

History suggests the market's wild ride may not be over. 

That's because the weeks preceding, including, and following Super Tuesday historically are more turbulent than average for stocks. Going back to 1980, the S&P 500 has risen 2% or fallen 2.6%, on average, in the three weeks surrounding this day, according to FactSet data analyzed by Grow. By comparison, a typical week in the past 40 years has seen this benchmark rise 1.6% or fall 1.7%.

Looking at daily moves, Goldman Sachs found that Super Tuesday has rarely been positive for the stock market. Since 1996, both the S&P 500 and Dow Jones average have fallen about 83% of the time in the six periods leading up to Super Tuesday, with each benchmark falling an average of 0.7%. Shortly thereafter, though, stocks have always stabilized or risen again.

As Goldman Sachs told clients in a note, there's likely to be turbulence around these contests once again this year. Here's how to keep perspective.

Politics affect your portfolio less than you probably think

Democratic contestants vying for a Super Tuesday win include former Vice President Joe Biden and Michael Bloomberg, the former New York City mayor, as well as Senators Elizabeth Warren and Bernie Sanders and Representative Tulsi Gabbard.

This election season has resulted in some bold claims about the potential negative impact the more progressive Democratic candidates, Senators Warren and Sanders, could have on the stock market. That said, similarly dire predictions back in 2016 about the aftermath of President Donald Trump's victory didn't come true.

Markets can be surprisingly resilient, even impervious, to politics. In the past 40 years, only one resident of 1600 Pennsylvania Avenue, President George W. Bush, saw the U.S. stock market decline during his tenure. 

And since 1928, only two other presidents have seen the market end up lower on their watch. The S&P 500 crashed about 77% during Herbert Hoover's time in office and 30% during Richard Nixon's presidency, according to data from Macrotrends. Under every other U.S. president, markets have gone up.

Even when Super Tuesday results have affected the market in the past, the market has recovered in short order.

The S&P 500 has been higher by the end of that three-week period following eight of the past 10 Super Tuesdays, with the exceptions being 2004 and 1980. Even in those particular years, the market ultimately ended higher by year end.

Market swings create opportunity for long-term investors

This year's Super Tuesday arrives at a wild time for the U.S. stock market. In the span of less than 10 days, the S&P 500 notched a new all-time high, then tumbled more than 12%. The sell-off marks this benchmark's first correction since late 2018, or decline of at least 10% from a recent high.

The market has seen more violent daily movements than normal. Moves in excess of 3% up or down are pretty rare for the S&P 500; they've happened fewer than five times a year, on average, since 1980. In just six days, this benchmark logged four moves of such magnitude.

As the past couple weeks show, the market has gotten less calm — and that's actually good for investors. While it can be difficult to watch the market lurch, the upside is you have the opportunity to invest when stock prices are lower.

VIDEO0:5900:59
Stay the course: Why keeping calm is the best investment strategy

Video by David Fang

While there are ways to manage your risks when investing, the stock market has always bounced back following significant dips like the current one. Since World War II, the average correction for the S&P 500 has lasted four months and it took another four months for the market to recover, according to analysis by CNBC and Goldman Sachs. On average, this benchmark tumbled 13% before its decline stopped.

To ensure you don't miss out on the market's eventual rebound, experts recommend that you take advantage of a strategy known as dollar-cost averaging. This involves investing money into the market at set intervals, no matter whether the market is up or down. It simplifies the process, allows you to take advantage of normal price fluctuations, and removes any potential emotional bias.

Finally, remember that it's nearly impossible to predict the market's next steps in the short term, even for professional investors. That's why you're better off continuing to add money to the market and giving yourself the longest possible time horizon to benefit from the market's long-term historical success.

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