The earthquake, tsunami and subsequent concerns regarding Japan’s nuclear energy facilities have challenged its citizens and its economy, which is one of the world’s largest. During times like these, our focus should be on helping the citizens of Japan in any way possible. However, the stock market’s short-term reaction has unfortunately become the focus for many onlookers.
Throughout history, numerous events have caused short-term drops in the domestic stock market. See the “Crisis Events” attachment for a complete record. In each instance, fear and uncertainty led to sharp declines in short amounts of time. While there is no guarantee, suffice to say, in each instance, the market recovered from the drop caused by the crisis – and, it climbed higher over time. See the “Market Recovery” attachment for a visualization of market recoveries after financial crises.
The chart below shows the growth of a dollar since 1926 - as invested in the S&P 500 and a hypothetical 60/40 Portfolio (comprised of 60% S&P 500 and 40% bonds, both intermediate corporate and intermediate governments.)
* Over time, both the all equity S&P 500 and the 60/40 Portfolio have adjusted and grown.
* The S&P 500 has returned a 9.9% compounded average annual return while the 60/40 Portfolio has returned 8.7%.
As you can see, world events have caused short-term drops in the stock market over the past 85 years. But in each instance, one of the best strategies has been to stay invested and ride the market. Resist the temptation to change your strategy during up or down market movements. It’s a tenet of our investment philosophy, which is based on time-tested institutional principles that provide a framework for taking emotion out of investing.
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Emmett Wright, CFA
Chief Investment Officer
Northwestern Mutual Wealth Management Company
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