The Upside of Fear

Maybe it’s the time of year, but we have taken quite a few calls from clients lately asking whether the market is about to crash. They are not alone. Earlier this month, 53% of respondents to a survey by the American Association of Individual Investors expected stocks to fall over the following six months. That is not the same as predicting a crash, but the level of concern is striking.

Ironically, there is some comfort in that. Historically, when at least half of respondents have been bearish, US stocks have delivered higher average returns over the following six months than they have after an average week. But sentiment is no crystal ball. Investors were fearful for months in 2008, and stocks kept falling.

If a crash does come, it will not feel like an opportunity. Prices fall, nervous investors sell, and further falls persuade others to join them. By the time selling reaches its peak, buying can feel unthinkable. Yet, over the past 30 years, 76% of the S&P 500’s best performing days occurred during bear markets or in the first two months of the next bull market.

There are also reasons to keep faith through times of elevated uncertainty. In the late 1990s, who could have valued a mobile phone by imagining everything we now do with a smartphone? Artificial intelligence may be at a similarly early stage, with its most valuable uses still ahead of us. Either way, companies will continue to invent, adapt, and grow, regardless of how investors are feeling.