Reactions to Market Downturns—and Potential Implications

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reactions to market downturns—And potential implications


May 26, 2022

Recent market volatility is stressful to many investors and invites comparisons to prior selloffs, especially the 2020 onset of the COVID pandemic. In this report, The Mather Group, LLC (TMG) reviews the outcome of that sudden market fall, the risk of a market downturn leading to a U.S. recession, and the potential financial cost of “market timing” during a selloff.

The Standard & Poor’s 500 Index (S&P 500) had a significantly positive start to 2020, reaching an all-time high of 3,386 on February 19. This level was 5.1% above its 2019 close, achieved just 51 days earlier. The sudden specter of COVID then emerged, reversing this rise dramatically. In just 32 days, the S&P 500 fell -33.9% from its all-time high, descending to a level of 2,237. Massive fiscal stimulus and Federal Reserve Board (Fed) liquidity injections then ensued to help reduce further market disruptions.

Retail and institutional investors pursued two primary strategies in response to COVID and this March 2020 selloff.


As shown in the graphic below, there was a significant flow of liquidity into government money market funds that month, totaling $691 billion. This liquidity largely came from the panic selling of other asset classes, such as equities and fixed-income securities. However, these inflows fell markedly in the April-May period, and then became an outflow in June as the market reversed its sudden downward path.


Other investors saw the magnitude of the downturn as an opportunity to remain fully invested and even to purchase more assets, hewing to Warren Buffett’s maxim: "Bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price." While this level of additional investment was modest on a percentage basis, as shown in the graphic below, it offset total outflows from domestic equity exchange-traded funds (ETFs) by $31 billion in March. Further inflows of $39 billion followed from April through June. TMG is among the investors who opportunistically capitalize on downturns by rebalancing portfolios during periods of market volatility.

Both strategies, of course, may have been appropriate for the investors who pursued them. However, for those investors who remained fully invested—or even added funds at or near the market bottom—2020 returns were quite attractive. Overall, the 2020 total return for the S&P 500 was 18%. For those investors investing at its March low, the S&P 500 returned a remarkable 68% in just nine months. Of course, past performance is no guarantee of future results.

With the S&P 500 recently approaching a potential bear market level, i.e., a drop of 20% from a recent high, many investors are asking if such market selloffs always result in a U.S. recession. A recession is defined as at least two consecutive quarters of negative growth in gross domestic product (GDP).

The most posited link between market performance and potential recessions is that consumer sentiment and spending often fall in sync with markets. Historic data suggest instead that this linkage may be tenuous. Since the end of World War II, the U.S. economy has experienced 12 recessions and 14 bear markets. However, as shown in the table below, no recession resulted from eight of the bear markets that occurred during this period. Thus, there can be no certainty today that a recession will follow this current period of market volatility.

For those investors who considered turning some or all their portfolios into cash during the 2020 downturn—or even those considering it today—two critical decisions must be made. The first is when to sell, and, just as importantly, the second is when to move cash back into the market to achieve such long-term financial goals as retirement. This is the essence of “market timing,” whether attempted by retail or institutional investors.

As shown in the table below, the potentially adverse financial cost of market timing can be quite significant. More specifically, $1,000 invested in the S&P 500 in January 1970 and left fully invested would have grown to $139,000 by August 2019, resulting in a 10.7% annual return before inflation.

However, for market-timing investors who were out of the market on each of its best days during this 49-year period, their portfolio results fell below this 10.7% annual return. When adjusted for 4.0% annual inflation occurring during this period, market-timing portfolio results were even starker. For example, missing just 25 of the market’s best days resulted in an inflation-adjusted return of about half that achieved by the fully invested portfolio, or a shortfall of $106,000. Thus, market timing may add an unnecessary but significant source of risk for many investors pursuing long-term financial goals.

Despite periods of market volatility, your financial plan plays a critical role in helping you maintain progress toward achieving your financial goals. Your trusted TMG advisor is ready to respond to any questions or concerns you might have, and to help assure that your financial plan remains both timely and actionable. Please reach out to your advisor for guidance at any time.


Data Sources: Bloomberg; Dimensional Fund Advisors; Federal Reserve Board; Investment Company Institute; National Bureau of Economic Research; Reuters; S&P Global Corporation; US Bureau of Economic Analysis; Wall Street Journal; Warren Buffett, as quoted in the New York Times (October 16, 2008)

The Mather Group, LLC (TMG) is registered under the Investment Advisers Act of 1940 as a Registered Investment Adviser with the Securities and Exchange Commission (SEC). Registration as an investment adviser does not imply a certain level of skill or training. For a detailed discussion of TMG and its investment advisory services and fees, see the firm’s Form ADV on file with the SEC at, or on the firm’s website at The opinions expressed, and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The opinions and advice expressed in this communication are based on TMG’s research and professional experience and are expressed as of the publishing date of this communication. All return figures and charts shown are for illustrative purposes only. TMG makes no warranty or representation, express or implied, nor does TMG accept any liability, with respect to the information and data set forth herein. TMG specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice. Investing involves some level of risk. Past performance does not guarantee future results.

An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index, as an investment vehicle replicating an index would be required. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Please feel free to contact us for additional information on any indices mentioned.


  • Standard & Poor's (S&P) 500 - A stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

The Mather Group



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