The S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) have added 8% and 9%, respectively, this year. The driving force behind that upside has been surprisingly strong corporate earnings, especially within the technology sector.
Unfortunately, investors have reason to worry that both major indexes could drop sharply in the months ahead. Inflation tied to rising oil prices may force the Federal Reserve to raise interest rates, and midterm elections tend to make the market nervous.
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However, even if those major stock market indexes crash, history says investors who simply buy the dip will come out ahead in the long run. Here are the important details.
Oil prices just notched their largest weekly gain in several months, with futures contracts for West Texas Intermediate (WTI) crude (the U.S. benchmark) and Brent crude (the international benchmark) rising roughly 13% over the seven-day period that ended on July 17. That inflationary pressure makes it more likely that the Federal Reserve will pivot to interest rate hikes this year.
So what? In the last 40 years, the Fed has initiated nine tightening cycles, meaning it has pivoted from rate cuts to rate hikes nine times. Following the first hike in each cycle, the S&P 500 and Nasdaq Composite fell by an average of 10% and 12%, respectively, at some point during the next three months. In other words, both indexes usually fell into correction territory.
Additionally, midterm elections tend to incite larger stock market drawdowns. In the last 40 years, the S&P 500 and Nasdaq Composite have declined by an average of 17% and 24%, respectively, at some point during midterm years. That happens because the political party in the White House usually loses seats in Congress, which creates uncertainty about the president's political agenda.
The S&P 500 has suffered six market corrections in the last decade, and two of them eventually became bear markets. However, following the index's first close in correction territory (i.e., the first day it closed at 10% below its high), the S&P 500 returned an average of 18% over the next year, and it added 40% over the next two years.
Source: Yahoo Finance Top News — This article was automatically imported from the source. Read full article at original source →
